The Hindu Business Line : RBI group for currency futures in forex market

Mumbai, April 28 The RBI’s Internal Working Group on Currency Futures has recommended the introduction of currency futures in the domestic foreign exchange market.

In the final guidelines released today, the group said that the most liquid onshore currency pair, i.e. USD-INR (US Dollar Indian Rupee) may initially be considered as an eligible underlying pair for those participants seeking to hedge their foreign exchange exposure. Other currency pairs, especially Euro-INR may be considered after a period of six months.

“Participants wishing to hedge specific currency exposures other than USD-INR may consider approaching the forwards market for the same. Based on the market feedback and experiences gained, the introduction of other currency pairs can be considered at a later stage. In other words, the Group recommends that initially only USD-INR currency futures contract may be introduced at the outset,” the report said.

The flipside to such an arrangement would be that there would be no direct hedge available for participants with non-USD exposures. To mitigate the situation, other currency pairs, especially Euro-INR, may be considered after a period of six months. Introducing only USD-INR pair would mean that liquidity is retained within one contract in the initial stage, the report said.

Initial phase

In the initial phase, the group recommended a standardised product across various exchanges (in terms of contract size, final settlement dates, settlement procedure of contracts, tenors of contracts, etc). This would invite greater participation and add to the liquidity of futures markets.

The group recommended that a single contract of notional value of $1,000 may be introduced, so that individuals and SMEs are able to trade on the same prices as are available to the large customers and the tenor could stretch out to 12 months.

Since the rupee is not fully convertible, these contracts must be settled in cash, based on the central bank’s reference rate on the contract expiry date.

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