Does offshore NDF market influence onshore forex market? Evidence from India

The paper uses a vector error correction model-multivariate generalized autoregressive conditional heteroskedasticity approach to examine the interrelationship between onshore and offshore nondeliverable forward (NDF) markets for the Indian Rupee. The empirical results suggest a stable and bidirectional long-run relationship between onshore and offshore markets. The subperiod analysis implies that there are unidirectional mean spillovers from NDF markets to onshore spot, forward, and futures markets during the post-taper tantrum period. Regarding "volatility spillover," the analysis indicates a unidirectional volatility spillover from spot and forward segments to NDF market in normal circumstances, which turns bidirectional during times of depreciation pressure on the rupee.