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Currency futures find favour with HNIs as equities are overvalued

Currency futures find favour with HNIs as equities are overvalued
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First Published: Tue, Apr 27 2010. 12 06 AM IST
Updated: Tue, Apr 27 2010. 12 06 AM IST
Mumbai: Kalpesh Mehta of Vile Parle, a Mumbai suburb, is investing in currency markets. A chartered accountant, Mehta has started investing in the currency futures in the last six months.
Mehta, 43, is one of those retail investors who have started dabbling in currency futures in search of an alternative investment opportunity.
Most of them are high networth individuals (HNIs) and there are some speculators as well. But Indian investors are no Mrs Watanabe—a market metaphor for Japanese housewives speculating in yen.
According to a 2009 Asia Times Online article, Mrs Watanabe sprang back to life with increased sophistication and was instrumental in increasing the size of the yen trades, taking long positions against major currencies—now wiser after years of financial turmoil. The Indian investors are nowhere close to that.
There is no data on the participation of retail investors in currency trade, but anecdotal evidence suggests the trend has started. The reason? The equity market is overvalued. India’s benchmark Sensex index is trading at about 21 times estimated earnings for fiscal 2011. Commodities have also risen considerably, with gold rising more than 11% in the last six months.
In the $40 billion (Rs1.77 trillion) a day over-the-counter currency market, corporations and banks were dominant and retail investors so far largely stayed away, fearing the complexities involved in the trade and lack of opportunities. But things are changing after currency futures were introduced in August 2009.
The daily average trade volume in futures in recognized stock exchanges averages $7-8 billion. While the exchanges won’t share the data on what is the share of retail investors in currency futures trades, currency consultants and brokers, through which retail investors open their accounts, say retail investors now constitute at least 15% of the total trade.
“At least three-four people come to us every week to open accounts for currency trading,” said Satyajit Kanjilal, managing director of Forexserve, a currency consultant.
Emails to MCX-SX and National Stock Exchange (NSE) remained unanswered.
The participation will rise, say brokers, after options are introduced. The Reserve Bank of India said in its annual monetary policy that it would introduce plain vanilla options in the dollar-rupee pair, but did not give a time.
While in futures an investor has to buy the currency at a pre-decided level, options would give her the freedom to choose whether she really want to buy the currency she bet on.
According to Kanjilal, the introduction of the other currency pairs have also drawn considerable interest in futures. In three months since February, when the pairs were introduced, the volume of the currency futures markets in MCX-SX has gone up to Rs9.65 trillion from Rs5.89 trillion in three months between November and January, before the introduction of the new pairs.
In case of NSE, the volume has gone up to Rs7.89 trillion, from Rs5.62 trillion. Data on the Bombay Stock Exchange could not be found from its website.
Quite a few overseas firms that specialize in retail trades in currencies have opened their offices in India. Alpari Group, the biggest retail foreign exchange consultant in the UK and the US, is one of them. It is now holding roadshows to educate retail investors about currency markets with an aim to expand business here.
According to Alpari India’s chief executive Pramit Brahmbhatt, the firm has got licences from exchanges to start its business and will soon start offering accounts to clients.
Queries on currency markets by retail investors are increasing and some banks, especially private and foreign lenders, are planning to introduce currency markets products, said an executive of a stock exchange, who declined to be named because he is not authorized to speak to the media.
R.V.S. Sridhar, treasurer of Axis Bank Ltd, said his bank has not introduced any such product, but is seeing customers asking for such products.
“Customers are coming to us to enable them to trade in currency markets. As a member of exchanges in currency futures, we advise them on how to go about it, help them in documentation. But we don’t advise them on when they should buy and sell,” said Sridhar.
Union Bank of India treasurer S. Rajendran said his bank is seeing customer query on investing in currency markets.
According to a foreign bank executive, his bank has not introduced any specific currency futures product, but customers are asking for such. The majority of the investors, according to the executive, use futures to hedge their exposures rather than to make profit out of it.
Ravi Krishnan contributed to this story.
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First Published: Tue, Apr 27 2010. 12 06 AM IST