Central bank proposes new currency pairs in futures market

Central bank proposes new currency pairs in futures market

Mumbai: In an effort to boost the exchange-traded currency derivatives market, the Reserve Bank of India (RBI) has proposed allowing stock exchanges to extend currency futures contracts to euro-rupee, Japanese yen-rupee and pound sterling-rupee pairs, and said it is working on amendments to existing regulations to allow such trades.

Currently, currency futures trading is limited to dollar-rupee contracts traded in sizes of $1,000 (Rs46,800 today) each, with a maximum maturity of 12 months. Currency futures are standardized foreign exchange derivative contracts traded on an exchange to buy or sell one currency against another on a specified future date at a price specified on the date of contract, but without a forward contract.

“Market participants have been representing that trading of currency future contracts in other major currency pairs may also be permitted to facilitate direct hedging of their risk in such currencies," the central bank said in its second quarter policy review released on Tuesday.

The move will allow companies and banks to hedge their exposure to loans in these currencies. Following an August 2008 recommendation by the RBI-Sebi (Securities and Exchange Board of India) Standing Technical Committee, the central bank had allowed three exchanges—the National Stock Exchange (NSE), the Multi Commodity Exchange-Stock Exchange (MCX-SX) and the Bombay Stock Exchange (BSE)—to trade in dollar-rupee currency futures.

Market participants said the new proposal, if implemented, will increase the turnover of the currency derivatives market. The combined average daily turnover of currency futures trading has gone from $1.1 billion in March to $2.5 billion at the end of September, according to RBI. However, the industry is still dominated by the over-the-counter (OTC) market because of the unavailability of other currency-related derivatives on the exchanges.

“It is a right step taken to facilitate development of market and ensure greater financial inclusion through direct hedging of risk in other currencies by exporters, importers, corporate houses and banks across the country," said Joseph Massey, managing director and chief executive officer of MCX- SX, which had an average daily turnover of Rs5,771.88 crore in September. NSE had an average daily turnover of Rs5,673.10 crore in September, while BSE failed to generate any revenues.

B. Prasanna, managing director and chief executive of ICICI Securities Primary Dealership Ltd, said the move would benefit mid-size firms. “If the RBI’s proposal is implemented, we may see a 25% increase in turnover of the currency derivatives market in the next three months," he added.