As London does more rupee trading than Mumbai, authorities in India are taking steps to get foreigners to transact onshore. Analysts say that will be no easy task.

There’s no good reason for market participants to switch from excellent global trading hubs such as Singapore and London, said Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte, who’s extensively traded currencies in offshore markets over a three-decade career. For Schroder Investment Management Ltd, the need to add more counterparties would just increase investors’ trading costs.

India’s authorities are concerned a surge in rupee trading overseas threatens the stability of the currency, especially in times of stress. That worry has intensified after London overtook Mumbai as the top trading centre. In response, India has been moving to make its onshore market more attractive and preparing to replicate offshore centers in specially designated financial zones within the country.

For Halley, that’s like fighting the waves.

“Institutions have access to a Michelin 3-star menu” of currencies from “all over the world, all in one centre,” in hubs like Singapore and London, he said. “Banks would have no incentive, from a purely cost basis alone, to set up a separate operation onshore.”

At issue is the rise of derivatives known as non-deliverable forwards (NDFs)—bets on the direction of a currency made in offshore centres, beyond the rules of domestic authorities and without the need to deliver the currency itself. The contracts, which allow investors to hedge, arbitrage and speculate in non-convertible currencies such as the rupee, can be traced back to the 1990s but have surged in popularity in recent years.

London has become the biggest centre for trading the Indian currency, according to the latest survey by the Bank for International Settlements in September. Average daily volumes for the rupee in the UK soared to $46.8 billion in April, exceeding the $34.5 billion recorded in India. Volumes have also substantially jumped in other centres like Singapore, New York and Dubai.

“It will be a better world for us if there is no NDF market, but we cannot wish it away,” former Reserve Bank of India chief Duvvuri Subbarao famously said during the US taper tantrum of 2013 when the Indian currency was plummeting to record lows on an almost daily basis, with NDFs blamed for a surge in speculative trading.

In a report in July, an RBI task force on offshore rupee markets recommended getting trading back to the onshore market by extending trading hours and allowing local banks to offer price quotes to foreigners round the clock. It also said non-deliverable forwards trading should be permitted in special centres within India that would replicate the attractiveness of offshore locations.

In October, the RBI said it would allow rupee trading by customers outside the jurisdiction of the domestic economy in low-tax venues.

The International Finan-cial Services Centre in the Gujarat International Finance Tec-City, or GIFT City, an effort by Prime Minister Narendra Modi to replicate the market in Singapore, is awaiting regulatory approvals before becoming the country’s first venue to offer NDF rupee contracts.

In the existing onshore over-the-counter market, foreigners are allowed to hedge only on the basis of their underlying exposure. They can only enter into plain vanilla forwards and option contracts and are generally not allowed to rebook a contract once canceled.

BSE’s subsidiary India International Exchange (IFSC) Ltd, which will probably spearhead the launch of the rupee derivatives, says the new venue will be cost-competitive. But that alone won’t be enough to attract trading, according to investors.

Manu George, Senior Investment Director at Schroder Investment Management in Singapore, said it’s difficult to see a situation where offshore trading migrates to within India’s borders.

“India is not a major FX trading hub and so it’s inefficient from a firm’s point of view as there are more counterparties to generally trade FX than onshore in India,” he said. “Adding further counterparties adds to the cost and expense of setup and trading.”