Photo: Bloomberg
Photo: Bloomberg

RBI intervened in currency derivatives market in September

The move went largely unnoticed, though it gave rise to talk that RBI is making its presence felt beyond OTC markets

Exchange-traded currency derivatives, suspected to have hastened the Indian rupee’s fall to all-time lows in 2013, now seem to have come under the Reserve Bank of India (RBI)’s influence, with the central bank having intervened in the market in September.

RBI’s monthly bulletin showed that it had intervened in the exchange-traded derivatives market by taking positions in the futures segment. The central bank had both sold and bought $355 million in currency futures.

RBI regulates over-the-counter (OTC) cash, spot and derivatives market of both bonds and the rupee as banks are the main players transacting and the movement of exchange rates has a bearing on monetary policy. Exchange-traded derivatives come under the purview of the Securities and Exchange Board of India (Sebi), given that these are traded on the currency segments of stock exchanges and accessed by members. RBI also oversees the market, but it is more peripheral.

According to two currency dealers, the September intervention of RBI in the currency futures market went largely unnoticed, although it gave rise to some talk that the central bank is making its presence felt beyond the OTC markets of the rupee. The rupee’s sharp 1% fall in two weeks in August following the Chinese renminbi’s surprise devaluation also fuelled these talks. However, three public sector bank dealers that Mint spoke to said that RBI’s presence was likely limited to enquiries and not material intervention.

That RBI intervened is now clear from the data. On Wednesday, RBI announced it would intervene if needed in exchange-traded derivatives, which was met with considerable surprise from market participants given that, historically, the central bank has been circumspect about its interventions and has detailed them only in the bulletin with a two-month lag. Incidentally, RBI did not detail its September intervention in the November bulletin, even though details of interventions in the OTC market were given.

“The amount involved was small and I doubt anyone in the market got wind of it. Now that the futures market comes under their intervention fold, part of the problem of volatility is solved as this would kill the arbitrage between markets," said a senior currency dealer with a foreign bank, who requested anonymity.

Forex experts said RBI’s moves reflect its worry that volatility in currency markets could heighten once the US Federal Reserve begins raising interest rates. Divergence in monetary policy across advanced economies is expected to create considerable volatility in global currency markets over the next few months. The Fed is expected to begin raising rates in December even as the European Central Bank announced further economic stimulus measures last week. The domestic futures market is more illiquid than the OTC forwards, making arbitrage between onshore futures and offshore non-deliverable forwards (NDFs) more lucrative, said the dealer cited above. Also, since it is not mandatory to have an underlying asset while taking a futures contract, it is easier for punters to place bets on the rupee and also benefit from the difference in the onshore and offshore rates.

In 2013, the rupee’s fall to a historic low of 68.85 per dollar was triggered by “the taper tantrum" globally, but was quickened by speculative positions taken by arbitrageurs between the onshore derivatives market and the offshore NDF market. The central bank clearly wants to avoid a repeat.

RBI is not alone in its move to intervene in the futures segment. Other central banks that have taken similar steps are those of Brazil, South Korea and China.

RBI has found many supporters for its move to intervene in exchange-traded futures, even though some did point out that exchange-traded products should be left to the market to decide. “We can argue that the central bank should keep its hands off the futures market if we were in an ideal free market world. But I don’t see any reason for them to keep off since they intervene in the OTC market extensively," said an analyst at a private bank.

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