Mumbai: Trading in currency futures that began with much fanfare in the last week of August seems to have failed to catch the fancy of Indian firms with not too many of them coming forward on account of so-called margin requirements and the low limit on volume.
The first requires them to deposit a certain proportion of the value of their contracts, called margin, with the exchange, and the second makes currency futures irrelevant for large companies.
Some of the firms have already hedged their foreign exchange positions and are not in a hurry to buy future contracts.
SLOW TAKE-OFF (Graphic)
On the day of the launch on the National Stock Exchange Ltd, or NSE, on 29 August, many firms rushed to sign deals and 65,798 contracts worth $65.8 million of currency futures were traded. In the past eight trading sessions, that level has not been breached even with trading volumes slipping to 24,344 contracts on one day.
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On Wednesday, 44,036 contracts were traded.
And the trading has been dominated by the near-month contracts and there has been very little trade in six-month contracts and beyond.
“We are unable to understand what advantage we’ll have with currency futures,” said a senior official with the treasury department of Dr Reddy’s Laboratories Ltd, India’s second largest drug maker by sales. According to him, the margins are a deterrent and these products are rigid as one needs to take delivery on a particular day. “We are doing our hedging by buying derivatives from banks,” said the official who did not want to be named.
Companies are required to deposit 1.75% of the value of the contracts as margin with the exchange to trade in futures but such margins are not required for booking forward contracts through banks where companies pay a flat fee per contract.
“Companies do not want to part way with cash, their working capital. So they might prefer forwards more than futures,” said R.V.S. Sridhar, senior vice-president, treasury, Axis Bank Ltd, India’s third largest private sector bank.
A few foreign exchange dealers also said large firms would not be seriously interested in the futures market because the trading limit is set at $5 million. On the other hand, at over the counter, or OTC, market, the lot size is typically $10 million.
“For hedging requirement, the OTC (over the counter) market is more sophisticated, cheap and efficient,” said Rugved Dhumale, senior manager, risk management solutions, at foreign exchange trading firm Mecklai Financial Services Ltd. “In a forward contract, you can actually get the physical delivery of the dollar, which is what companies want.”
In the currency futures trade, the settlement is done in rupees.
The average daily turnover in the foreign exchange market has almost doubled, from $25.8 billion in 2006-07 to $48.1 billion in 2007-08 reflecting large international trade inflows. India is the 17th largest foreign exchange and derivatives market in the world.
“We like to fully understand the products before entering this market. We have hedged about 80% of our positions for the next six months,” said Santosh Singhi, chief financial officer of Amtek Auto Ltd, a New Delhi-based auto parts maker.
Foreign exchange dealers said that unless regulatory restrictions such as the $5 million cap and ban on trades by non-resident Indians (NRIs), foreign institutional investors (FIIs), and mutual funds are relaxed, the market will not be liquid. They also said the currency futures market may face the same fate the interest rate futures market faced in 2003.
“As of now, this market will be dominated by those who want to arbitrage between forwards and the futures,” said the chief currency dealer of a foreign bank who did not want to be named. “Unless NRIs, FIIs are allowed to enter this market, and the lot size is increased, there is no way it can thrive.”
Interest rate futures, introduced in June 2003, failed to take off as market participants were apprehensive of betting on futures in the absence of a reliable spot curve. The pricing benchmark was also not clear and there were only three products in the market—the 91-day treasury bill, 10-year zero coupon bond and 6%10-year bond.
However, not everybody is so pessimistic.
According to Jayant Manglik, head of commodity business, Religare Commodities Ltd, currency futures will work. “Retail participation will grow on a curve; it will not happen overnight. It will follow the progress of the commodities future where it started slowly, but once the process and knowledge was clear, it took off in a big way.”
Religare plans to organize roadshows from next week across India to educate prospective clients of currency futures.
“By the time interest rate futures are reintroduced in December-January, currency futures would take off quite substantially,” said Manglik.
India’s capital market regulator Sebi and the central bank, Reserve Bank of India, have been talking about the re-introduction of interest rate futures by the end of the year.
Meanwhile, NSE plans to launch currency futures in other currencies such as euro, Japanese yen, Chinese yuan and pound sterling even as the Bombay Stock Exchange Ltd and Multi-commodity Exchange of India Ltd are getting ready to launch currency futures from their platforms.
So far, currency futures trade is done only in the US currency (against the rupee).