Mumbai: India hits the button on its first exchange-traded rupee futures on Friday as part of its push to develop more sophisticated markets and hedging tools, and to beat back a fading challenge from an offshore competitor in Dubai.
Market players expect a steady rather the spectacular start when the National Stock Exchange (NSE) launches rupee futures, as investors overcome tight rules and lack of experience.
The contract size is $1,000, compared with 12.5 million Japanese yen ($115,000) or 100,000 Australian dollars ($86,000), for a single contract on the Chicago Mercantile Exchange.
The trading limit for individuals is $5 million and for trading members $25 million — not much even for a small bank trading $200-$300 million daily on the forwards market — and foreign institutional investors are excluded from the market.
“This will keep serious forex users like importers and exporters of reasonable size out of the markets for now,” said Jayant Manglik, head of commodity business at Religare Commodities.
“But a beginning has been made and as the limits increase, larger players too will start taking positions,” he added.
Furthermore, trading hours are 9am to 5pm, the same as the spot market, which dealers say makes futures of limited use as a lead indicator and no use for after-hours hedging.
Three other exchanges, including the Bombay Stock Exchange and the Multi Commodity Exchange of India, also plan to launch futures to complement an active over-the-counter forwards market.
Indian currency trading is dominated by the spot market. Forwards contracts are offered for up to 12 months, and cash plus forward market daily volume is estimated at $34 billion.
Senior dealers at Citibank, Standard Chartered and HSBC say banks will wait for volumes to swell before dealing heavily. Traders at Indian banks ICICI Bank and HDFC Bank and State Bank of India said they are also keen.
Last year, the Dubai Gold and Commodities Exchange launched a non-deliverable futures contract with a lot size of Rs20 million. But analysts say take-up there has been tepid as offshore rupee forwards in Singapore and New York are more liquid.
India is keen to have its own version to offer investors price transparency and provide a hedging tool against volatility in the rupee, which after gaining more than 12% on the dollar in 2007 has since turned tail to shed 10%.
Still, traders say futures are unlikely to steal much business from forwards, which are traded directly so that price and size are known just to the counterparties.
Exchange trading will also mean re-education for some.
“Operational differences from OTC markets like mark-to-market requirements will have to be fully understood by commercial users,” Religare’s Manglik said.
Nonetheless, an NSE official told a briefing last week 70 - 80% of the exchange’s 1,000 or so members and a sizeable number of banks were interested in futures trading.
The interbank market is optimistic the instrument will bring benefits, such as “netting”, where a bank’s trades are offset against each other to give one net position on the exchange, and will free up credit lines as counterparty risk is minimised.
Some analysts say the small contract size will make futures attractive for retail investors, while small- and medium-sized firms should get finer pricing than they are offered at present.
“It also seems tailor-made for the retail segment as the contract size is also pretty small, so you will see new players, new participants entering the market,” said Agam Gupta, head of trading at Standard Chartered Bank.
With three and possibly four exchanges gearing up to offer rupee futures, the key to success will be capturing liquidity. How that pans out will depend on what exchanges offer on margin requirements, membership fees and technology.
“NSE will have a first-mover advantage, but whether it will continue to have that advantage later as well, we don’t know,” said R.V.S. Sridhar, senior vice president of Axis Bank.