The Commodity Participants Association of India has sought clarification from the banking regulator RBI whether clients with only underlying exposure will be allowed to trade in currency futures trading from April 5 and if so all the open positions need to be squared off before the deadline.

In January, RBI had issued a circular stating that recognised stock exchanges may offer foreign exchange derivative contracts involving rupee to users for the purpose of hedging contracted exposure.

Further, it said exchanges may offer foreign exchange derivative contracts not involving rupee without any restriction.

In other words, CPAI said stock exchanges are mandated to notify clients that though they are not obligated to furnish evidence of underlying exposure for positions of up to $100 million, clients must ensure the existence of such exposures and should be able to substantiate that they have not already hedged using any other derivative product.

Contrast to 2008 order

The current stance of RBI is in contrast to the August, 2008 circular that said stock exchanges has to inform users that while they are not required to establish the existence of underlying exposure, they must ensure the existence of a valid underlying contracted exposure which has been not hedged using any other derivative contract and should be in a position to establish the same, if required.

RBI’s stance in 2008 was that the transactions in dollar/ rupee currency futures were permitted to hedge an exposure to foreign exchange rate risk or otherwise, CPAI said.

The association also wants to know whether the limit of $100 million applies to trade across all currency pairs involving rupee put together and across all exchanges, it added.

The unclear RBI circular comes at a time when volumes on the offshore currency futures markets at Dubai Gold and Commodity Exchange have steadily increased compared with on-shore exchanges. The policy makers have been promoting “Trade in India” with an unclear notification, said the CPAI.

“We have written to RBI also regarding concerns surrounding the potential disruption in market-traded currency futures underlying. It is crucial to acknowledge that various participants in financial players, arbitrageurs, besides just currency hedgers with underlying exposure, are involved in these markets which amplify the significance of addressing any potential disruptions effectively,” said Narinder Wadhwa, President, CPAI.

The association has urged the exchanges to issue a timely clarification along with a Frequently Asked Questions document to clarify the matter. Delay could potentially create a situation of panic at last moment.