The Hindu Business Line : Currency futures exchange welcomed

The Finance Minister, Mr P. Chidambaram, announced that the steps were intended to develop a transparent market for derivatives and interest rate futures.

The Finance Ministry’s initiative is broadly in line with the recommendations of the Reserve Bank of India’s Internal Working Group on currency futures in November 2007.

Currency futures, an instrument traded in a financial futures exchange, allowed for counter parties to hedge against exchange rate volatility. It is a futures contract that allows exchange of one currency into another at a specified date in future at a prefixed price. An interest rate futures is a futures contract with an interest bearing instrument as the underlying asset.

Currency futures

YES Bank’s Group President, Mr Ajay Mahajan, said, “Introduction of the currency/ futures market will allow for better price discovery and broadbasing of the market.” Currently, the market for currency, interest rate futures and derivative products is entirely done over the counter. This implied that the trades were only between large players, typically between banks and corporates or between banks themselves. As a result there was less transparency in the pricing of the products. In fact, the RBI’s working group recommendations for setting up such an exchange were for the purpose improving transparency.

Broadbasing implied that that more participants with underlying small denomination currency exposures could take part in the currency futures market. In fact, the RBI’s IWG had suggested a contract size of $1,000, identical to that at the currency exchange in Johannesburg, South Africa.

contract size

The low contract size would allow participation even by small and medium scale companies, bankers said. In fact, such a market was also likely to help exporters realise better value for their cross-border receivables, bankers said.

Commodity traders would also considerably benefit from the exchange. In fact, for commodity firms, the absence of such an exchange rate has been a major problem. But the currency futures exchange was also intended to bring home some of the currency hedging markets away from Dubai and Hong Kong where rupee futures and non-deliverable rupee forwards are traded and for improving supervision on such financial instruments.

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