RBI to ease curbs on exchange
traded currency futures
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.
http://www.thehindubusinessline.com/economy/rbi-to-ease-curbs-on-exchange-traded-currency-futures/article5916083.ece