Will offshore activity in Nifty, rupee futures shift base to Gujarat?

The proposed international finance centre (IFC) in Gujarat is betting big on shifting the offshore trades in rupee and Nifty futures to India. How big is the offshore market for these instruments? Will investors want to shift to the Indian IFC?

Futures contracts of the Nifty are traded on the Singapore Exchange (SGX) and the Chicago Mercantile Exchange (CME). While Nifty futures’ turnover in the latter is rather small, there is significant trading on the SGX. The average daily turnover in Nifty futures on SGX in February was $1.09 billion — almost 50 per cent of that traded on the NSE ($2.23 billion). But Nifty futures account for only about one-fifth of the Nifty trades in India, with Nifty options making up the rest. Nifty option trading on the SGX is negligible.

Rupee futures are traded on the ICE, CME, SGX and DGCX (Dubai Gold & Commodities Exchange). DGCX is the largest offshore platform for rupee futures with average daily volumes of around $1.5 billion. But there is a large market for the rupee in the offshore non-deliverable forward (NDF) market, which is fairly opaque with little information in the public domain.

Exchange-traded currency futures within the country witness $5.08 billion turnover a day, including the volumes on the National Stock Exchange, the BSE and the Metropolitan Stock Exchange (formerly MCX SX). If the inter bank and merchant spot trades are added, daily onshore volume in the rupee can range from $20 to 30 billion.

The preference for offshore markets is due to the more flexible regulatory regime and lower taxes and transaction cost. In Nifty futures, the longer hours of trading in offshore centres also helps. For instance, SGX Nifty futures trade from 6 am to 11.30 pm (IST). The other factor is cost.

The transaction cost for trading Nifty futures on the NSE is about 0.24 per cent while it is just 0.03 per cent in Singapore, 0.07 per cent in Hong Kong and 0.04 per cent in the US.

Rupee futures contract in DGCX also opens 30 minutes before Indian market and closes around midnight, says Pramit Brahmbhatt, CEO, Veracity Group. But NDF volumes will not be so easy to move, according to MV Srinivasan, Regional Head, South, Risk Advisory of Mecklai. “NDF markets are prevalent offshore to circumvent restrictions on rupee trading in domestic markets and to profit from arbitraging. So, this volume may not come to domestic IFCs.”