Economy

RBI to ease curbs on exchange traded currency futures

Lokeshwarri SK BL Research Bureau | Updated on April 15, 2014

Unwanted entrants: Volumes in the derivatives segment plunged after the RBI stepped up its war against speculation last year

To prop up volumes, may allow FIIs too

The RBI may allow foreign institutional investors (FIIs) to participate in the exchange-traded currency derivatives market, where volumes have been dropping at an alarming rate. To resuscitate this market, the Reserve Bank has also relaxed some of the trading curbs imposed in 2013.

The RBI had permitted futures and options on the rupee to be traded on the Indian stock exchanges in 2008. These instruments were aimed at helping small companies hedge their foreign exchange exposure.

Trading in these instruments started off briskly but volumes have been tapering over the last couple of years. The National Stock Exchange recorded average daily turnover of ₹21,700 crore in 2012-13. This dropped to ₹8,576 crore in April this year. On the MCX-SX, the drop was precipitous, from ₹13,600 crore to ₹3,100 crore during the same period.

Why currency futures?

Exchange-traded currency derivatives were touted as an answer to small importers and exporters who were getting a raw deal from large banks in the inter-bank currency market. “The rates are transparent in the stock exchange,” said Pramit Brahmbhatt, Group CEO of forex brokerage Veracity, in a recent interview with Business Line. “But in the case of the inter-bank market, if you are a small exporter or importer the rates might not be the actual rates prevailing. The banks might quote you higher rates.”

War against speculation

But besides hedgers, currency derivatives attracted traders and speculators to the consternation of the RBI. Volumes in the derivatives segment plunged after the RBI stepped up its war against speculation last year, as the rupee dived to its life-time low of 68.8 against the dollar. The RBI, under former Governor D Subbarao, realised that banks were playing on the price difference between the two currency markets — the exchange-traded currency futures and options market and the inter-bank forex market. This was said to be contributing to the currency’s weakness.

To stop the rupee’s slide, the RBI had doubled the margins (initial money deposited while trading derivatives) in this segment.

“This did impact volumes but only the large systematic speculators who drive the market in one direction moved out. But the normal retail speculators who do trading are still there,” says Brahmbhatt.

RBI backtracks

Upon taking charge, the new Governor, Raghuram Rajan, promised to roll back the measures introduced to curb currency speculation. In line with his promise, he has rolled back the extra margin on currency futures last week, a move that is expected to breathe life into this market.

In the April monetary policy statement, the Governor said foreign institutional investors will soon be allowed to hedge their forex exposure in the exchange-traded currency market. This move too should help increase liquidity.

Unwanted entrants Volumes in the derivatives segment plunged after the RBI stepped up its war against speculation last year.

Published on April 15, 2014

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