Photo: Bloomberg
Photo: Bloomberg

Data shows RBI becoming more active in ETCD market

Central bank's interventions in exchange-traded currency derivatives outstrip those in spot, OTC derivatives markets

The Reserve Bank of India’s (RBI’s) interventions in the exchange-traded currency derivatives (ETCD) market outstripped interventions in the spot and over-the-counter (OTC) derivatives segment in November, data from the central bank’s January bulletin released on Monday showed.

In November, RBI bought $2.4 billion in the exchange-traded currency futures market while its net position in the OTC forward market declined to $1.5 billion from $2.4 billion in October. In the spot dollar/rupee segment, RBI bought dollars more times than it sold and its net purchases added up to $500 million in November.

The latest data suggests that RBI is becoming an active participant in the ETCD market, perhaps due to concerns of speculative activity in the segment. Unlike the forward market where an underlying exposure is a must to buy or sell forward contracts, market participants can punt on the rupee without any underlying exposure in the exchange traded futures market.

“This leads to more speculators participating in the ETCD market," said Samir Lodha, managing director at currency risk management firm QuantArt Markets Solutions Pvt. Ltd. Lodha added that the ETCD market was dominated by small and medium enterprises and also has large participation by retail customers whereas the OTC forwards market is accessed by large companies.

Data from the National Stock Exchange shows a sharp rise in turnover and open interest in the ETCD segment between 20 November and 26 November. The turnover had risen to 17,151 crore on 26 November from 14,135 crore on 20 November. The average daily turnover in January so far is around 10,000 crore.

In November, the rupee had moved in the 65.50-66.50 range against the dollar and lost 1.4% as foreign institutional investors withdrew about $1.7 billion from the Indian stock and bond markets. The spot rupee closed at 66.81 per dollar in trading on Monday.

Last month, RBI, in the first such official statement, said it would intervene in the ETCD market if need be to check volatility. The first instance of such intervention was in September, according to RBI data shared publicly, when it bought as well as sold $355 million.

In its words, RBI intervenes in the foreign exchange market to curb excess volatility and not to fix the exchange rate at any particular level.

Its interventions in the ETCD market also follow the same principle, the central bank had indicated in its statement.

According to Bank of America Merrill Lynch, RBI considers 62-64 per dollar as fair value for the rupee.

“We continue to expect RBI to anchor 65 per dollar expectations given that Governor (Raghuram) Rajan indicates the INR fair value at 62-64 per dollar," it said in a note on Monday.

RBI is not alone in its interventions in the ETCD segment. Central banks of Brazil, South Korea and China have known to intervene in the exchange traded market in addition to the OTC markets.

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