VIEW POINT

Currency Futures in India

The exchange-traded currency futures are becoming a reality in India as the joint panel of the RBI-Sebi allowed trading currency futures on the stock exchanges, reaching an important milestone in Indian financial markets on August 6, 2008. The currency futures will be a market where every Indian resident is permitted to trade on futures and options on the INR/USD or the USD/JPY or the INR/CNY exchange rates.

The RBI has made the right decision as currency futures trading allows for hedging exposure in foreign exchange rate risk. A need for currency futures market could not have been felt more than now with the rupee-dollar exchange rate witnessing fluctuations on a regular basis.

Currency futures usually operate in markets that have fully convertible currencies, and the RBI is yet to allow full convertibility of the currency. However, the increased capital account liberalization and wider hedging opportunities have allowed the RBI-Sebi panel to decide in favor of currency futures trading. In the absence of currency futures trading in India, companies have to hedge their currency risk by entering into forward deals with banks where they agree to sell/buy the dollar at a future date and predefined exchange rate.

The Securities and Exchange Board of India (Sebi), The Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), the Multi-commodity Exchange of India (MCX) and the National Commodity and Derivatives Exchange Limited (NCDEX) have the structures as well as tried and tested monitoring and surveillance systems in place to track the market and check for discrepancies. The launch of currency futures contracts on the stock exchanges will fetch currency derivatives a grand success. And all the segments of the financial markets will have easy access to the Indian currency.

While stock exchanges will enable their large network of clients, traders, jobbers, arbitrators and speculators to trade in currency derivatives, the commodity exchanges will enable the hedgers, namely importers and exporters, who have genuine hedging needs for protection against bank rate fluctuations.

Granting permission to both the stock and the commodity exchanges to launch currency derivatives contracts will help an efficient price discovery process and will ensure that all market segments are served effectively.

As per the directives of the Sebi, the MCX has floated a separate company, MCX Stock Exchange, for handling currency futures trade in the country, whereas the BSE is planning to launch Exchange-Traded Currency Futures (ETCF) contract by early September.

The launch of ECTF contract will facilitate more transparency, efficient price discovery and better counterparty credit risk management and reduce transaction costs. Speaking about the international trading of Indian rupee, Dubai Gold and Commodities Exchange (DGCEX) was the first exchange in the world to trade a rupee derivative when it started trading in Indian rupee contract from June 7, 2007.

In our September issue of Portfolio Organizer, our cover story features the currency futures, detailing about its features and terms set by the RBI-Sebi joint panel. The magazine also features the buyback of shares, retirement plans and other interesting issues.

- B Sravana Kumar