Mumbai: In order to mitigate risk in forward currency transactions, the Reserve Bank has allowed Clearing Corporation of India Ltd to provide guarantee to inter-bank foreign exchange forward trades with a daily turnover of $17 billion.
“The RBI has accorded its approval to the Clearing Corporation of India Ltd (CCIL) for commencement of guaranteed settlement of inter-bank foreign exchange forward trades from the trade date,” the apex bank said in its mid-term policy review.
The guaranteed settlement of foreign exchange trades mitigates risks and also allows banks to use their capital in an optimal manner, it said.
A currency forward is a hedging instrument used by players having forex exposure to guard their returns against currency fluctuation.
Currently, 72 banks as members for foreign exchange settlement operations settle, on an average, 8,500 deals daily with a gross volume of $17 billion.
The exchange traded currency future started trading first on the National Stock Exchange on 29 August followed by Bombay Stock Exchange and Multi Commodity Exchange.
Presently, currency futures are in pair of Rupee Dollar. There are currencies like Euro, Yen, Pounds, Yuan in which India has strong underlying trade. Some of these currency futures will come into being eventually.
The CCIL would operationalise the settlement system within a month, once the issues relating to counter-party exposure and risk weights are advised, it said.
The CCIL provides a platform for guaranteed settlement of inter-bank foreign exchange trades to banks in India, it said, adding, settlement is on a multilateral net basis, with the CCIL becoming the central counter-party to the trades through the process of novation.