RBI may relax stand on currency futures

RBI may relax stand on currency futures

New Delhi: The Reserve Bank of India (RBI) may relax its stand and permit trading in foreign currency futures in existing exchanges, open such trades to foreigners and also allow derivatives in contracts other than just rupee-dollar.

A senior government official, who did not wish to be identified, said that a recent round of meetings between the finance ministry and RBI had held out hopes that the apex bank would revise its stand, spelt out in a discussion paper that was circulated two weeks ago.

The government is hopeful of getting currency futures trading operationalized by the end of the current financial year, the official added.

Once it is up and running, even those with small foreign currency exposures, typically small and medium exporters, will be able to buy a hedge to protect their earnings against any unexpected volatility in the exchange rate.

Currency futures are regarded as a key element in the country’s foreign exchange policy by the Union government, as their trading on an exchange can widen participation and create conditions for two-way movement of the exchange rate.

The largely one-way movement of the rupee over the last year has made it more challenging for RBI to intervene in the foreign exchange market.

The Indian currency, which rose 11.3% this year, traded at 39.75 to a dollar on Thursday.

RBI’s internal working group wanted currency futures to be initially restricted to Indian residents and rupee-dollar contracts.

The working group suggested that contracts could be settled in rupees once the contract’s life ends and foreign currency need not be delivered.

As contracts are to be settled in cash, there should be no problem in increasing the scope of products to cover other currencies such as yuan-dollar, said the same finance ministry official.

Further, as foreigners are allowed to participate in India’s over the counter (OTC) market for foreign currency hedges, the same facility could be extended to the proposed currency futures market, the official said.

Both the measures are expected to help in broadbasing the market.

Futures contracts are a commitment between two parties at an exchange to effect transactions at a preset price and date.

Exchange-traded contracts provide transparency. The prevailing OTC market for foreign exchange in India does not do that, however.

In an OTC market, deals are done over the telephone and the transactions lack the transparency of an exchange-traded contract.

Independent experts have welcomed the move to start currency futures trading, but are guarded about the proposal’s immediate success.

“Overall, it is good (the move towards currency futures). We are having a gap filled," said Samiran Chakra-borty, chief economist at ICICI Bank Ltd.

A banker, who did not wish to be identified, said that exchange-traded contracts are unlikely to gain popularity soon after they are introduced. He said that was because OTC participants, such as banks, are comfortable with the existing system.

However, some studies show that 85% of price discovery in global foreign exchange markets are on account of futures markets even if forward markets account for most of the trade volume, said the report of the high-powered expert committee headed by Percy Mistry.

The Mistry committee had looked at ways to transform Mumbai into an international financial centre.