Policy

India’s global exchanges await the ‘GIFT’ of rupee futures trade

Lokeshwarri SK BL Research Bureau | Updated on January 09, 2018

RBI is yet to decide on rupee derivative trade at Gujarat’s IFSC

The international financial services centre (IFSC) at the Gujarat International Finance Tec-City (GIFT) is evolving well, with the various exchanges in the zone progressing fast. There are, however, many regulatory issues that still need to be ironed out to help this nascent venture grow to its potential. The most important clearance awaited is with respect to allowing the trading of rupee derivatives.

The country’s leading bourses, the BSE and the NSE, have opened international exchanges at GIFT City. In November, the BSE’s India INX clocked an average daily turnover of around $87 million, against $5 million in March. The National Stock Exchange’s NSE IFSC, which began operations relatively late, is catching up. Both bourses recorded a cumulative trade value of over $100 million in November.

No to rupee futures

Markets regulator SEBI has allowed the exchanges to list and trade index, stock (both domestic and overseas listed companies) and commodity derivatives. However, the RBI is yet to permit trade in rupee futures at the IFSC. Experts say the central bank is apprehensive of losing control over rupee movement if offshore entities are permitted to trade in currency futures.

The RBI’s stance is puzzling, since it is widely known that there is a thriving offshore market for the rupee. The principal reason for setting up the IFSC was to move the offshore rupee trade to a zone within India so that speculation could be controlled. A March 2016 paper titled Features and trends in the non-deliverable forwards (NDF) market for the Indian rupee, by the Finance Research Group (FRG) at IGIDR, and commissioned by the City of London, estimates that the offshore markets for the rupee, such as the NDF market and the Dubai and Singapore exchanges, earn nearly $9.2 billion annually as fee income from rupee trades. The country can, literally, cash in on this if trades were permitted at the IFSC.

According to the report, the daily traded volume of the rupee in the onshore market was around $47.8 billion in the second quarter of 2016, while the offshore market for the rupee traded nearly $18.3 billion daily. The opaque NDF market accounted for a bulk of these offshore transactions.

Rupee trades boom

Another reason for permitting the trading of rupee futures on the GIFT IFSC is the surging interest in the rupee in overseas markets. On the Singapore stock exchange, the INR/USD futures trade recorded an 89 per cent jump in year-on-year (Y-o-Y) volume in October 2017. INR/USD futures traded on the CME hit a daily record of over 5,000 lots in May 2017. Traded volume of these futures on CME have nearly doubled in the first two quarters of 2017. The rupee options traded on the DGCX in Dubai also recorded a 40 per cent Y-o-Y in August this year.

Such movement is supported by the strength in the rupee this calendar year, the improving forex reserves, the lower level of public debt, and the country’s relatively superior economic growth. This is also corroborated by surging FPI flows into Indian debt.

Published on November 19, 2017

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