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Position limits must be raised for currency futures trading

Position limits must be raised for currency futures trading
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First Published: Thu, Aug 07 2008. 10 50 PM IST

Updated: Thu, Aug 07 2008. 10 50 PM IST
The Reserve Bank of India and the Securities Exchange Board of India, the banking and stock market regulators, respectively, have notified the guidelines for currency futures trading on stock exchanges.
The final guidelines are little different from the recommendations made by a standing technical committee comprising members from both the regulators, except for details on the participation of banks in this market.
The key worry about the recommendations (now accepted as guidelines) is the low position limit prescribed for trading members. Trading members can have a maximum gross open position of not more than $25 million (Rs105 crore now). A trading member which is a bank can have an open position of up to $100 million.
The guidelines don’t mention it specifically, but it is safe to assume that a position limit of $5 million (or around Rs21 crore) is applicable at the client level, based on the recommendations of the standing technical committee. That would leave out meaningful participation from large and mid-sized companies which have a much bigger hedging requirement.
While the higher limit for trading members that are banks is welcome, note that the currency futures platform was a good opportunity to provide users an alternative to over-the-counter (OTC) products currently offered by banks.
The exchange platform is much more transparent and the mechanism of having a central clearing house almost entirely negates settlement risk. The OTC market, on the other hand, falls short on this measure, as is evident by the plethora of court cases currently going on between some companies and banks on account of exotic currency derivatives positions that went sour.
But, with a position limit of Rs21 crore, the exchange platform is hardly a viable option for large and mid-sized corporates. In addition, banks don’t charge mark-to-market margins for OTC products, which may cause further hesitation among companies in accessing the exchange-traded platform, which is stringent in collecting margins.
True, small retail players that currently provide liquidity to the equity and commodity markets will help in building volumes on the platform.
But, low interest from genuine users doesn’t bode well for any market. If regulators are serious about seeing the new product succeed, they should create at least a level-playing field between the OTC and the exchange-traded platform.
Nestle India continues to record fast-paced growth
(PERFORMANCE BOOST) Food and drink company Nestle India Ltd has justified its stock price of 33 times trailing earnings per share by continuing to grow revenues and profit at higher-than-industry rates in the first two quarters of this year.
Revenues grew by 23.5% last quarter, despite a relatively high base— revenues had increased by more than 23% even in last year’s June quarter. This is the sixth consecutive quarter when its sales have risen by more than 20%.
True, some of the increase in revenues is owing to price increases taken by the company, but even volume growth has been impressive. In the first six months of the year, volumes grew by 17.8%, the main reason why revenues grew by 24.9%. While the milk products and nutrition division, the largest contributor to revenues, grew volumes at a lower rate of 10.9%, volumes of prepared dishes and cooking aids jumped by 29.9% and those of chocolates and confectionery rose by 20.4%. Sales of beverages were flat.
But on an overall basis, volume growth has been strong and this has been helped by the company’s focus on launching its products at low price points.
In a presentation to analysts this week, the Indian unit of Switzerland-headquartered Nestle SA pointed out that 40% of all FMCG (fast moving consumer goods) sales in the country were in products priced at less than Rs10. Although Nestle’s product categories don’t exactly cater to the mass market, lower price points do help in increasing penetration, as is evident from the results in the past many quarters. The increase in modern trade with large retail stores has further helped the company increase volumes, as has the launch of new products.
What’s more, margins have been more or less maintained despite input cost pressures. Prices of oils, green coffee, milk solids and wheat—all inputs for the company—have been on the rise. But the company has managed to offset these through price increases, and operating profit has risen by nearly 30% in the first six months of this year.
Apart from the strong growth and bright prospects, investors are also excited about the strong dividend payouts by the company.
In the last 10 years, the company has generated a net profit of Rs2,231 crore. But its net worth (share capital plus reserves) has risen by just Rs160 crore during the same period. What this essentially means is that the balance amount has been paid out as dividend.
The company’s high growth and strong dividend track record are what’s keep the stock ticking.
Write to us at marktomarket@livemint.com
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First Published: Thu, Aug 07 2008. 10 50 PM IST
More Topics: Currency | Futures Trading | RBI | Sebi | Markets |