NSE’s loss, Singapore’s gain: Rupee volumes on SGX surge as FII leave in hordes

RBI in January decided to restrict trading in exchange-traded currency derivatives on NSE and BSE to only those with underlying contracted exposure. (AFP)
RBI in January decided to restrict trading in exchange-traded currency derivatives on NSE and BSE to only those with underlying contracted exposure. (AFP)


  • The market's fears about the impact of RBI's decision to restrict the use of exchange-traded currency derivatives for hedging appear to have come true. Investors are ditching NSE in favour of the Singapore Exchange for trading in rupee-dollar futures.

MUMBAI : Mumbai: The Reserve Bank of India’s decision to curtail trading in exchange-traded currency derivatives has surfaced an unintended beneficiary some 4,000 km away—the Singapore Exchange, or SGX.

Volumes of rupee-dollar futures on the Singapore Exchange have surged since RBI’s restriction—which came into effect on 3 May—crimped volumes on India’s National Stock Exchange. NSE had enjoyed a 94% share in India’s exchange-traded currency derivatives segment.

Market experts had warned that RBI’s decision to allow trading in exchange-traded currency derivatives on NSE and BSE to only those with underlying contracted exposure would end its use to hedge foreign exchange risks.

The rule, announced in January, implied that only those with foreign currency exposure could trade in exchange-traded currency derivatives. Earlier, users having positions of up to $100 million each in any exchange-traded currency derivatives contract involving the rupee didn’t need to have an underlying position.

Also read | Mint explainer: Is it the end of exchange-traded currency derivatives?

Currency market experts attribute the increased trading of rupee-dollar futures on the Singapore Exchange to foreign institutional investors shifting to the island nation for such hedges, apart from the Indian rupee’s recent depreciation. After remaining stable for months at between 81.5 and 83 to the US dollar, the rupee fell to 83.6 in June. 

FIIs previously had the option of arbitraging dollar-rupee futures contracts on both NSE and SGX, with the same currency pair on the offshore non-deliverable forwards market (NDF). Now they have recourse only to SGX and NDF, said Jayesh Mehta, vice chairman and chief executive of DSP Finance.

“Earlier, FIIs could arbitrage between NSE dollar-rupee and NDF dollar-rupee. Now that option is only available between SGX and NDF, which is one of the reasons for the volumes on SGX rising in the June quarter," said Mehta.

The average daily turnover of rupee-dollar currency futures on the Singapore Exchanged jumped 28% from $1.45 billion in the March quarter to $1.85 billion in the June quarter, show data from Bloomberg and the stock exchanges.

In that same period, the average daily turnover of NSE’s currency futures tumbled 73% $3.39 billion to $912 million.

A cascading effect

While currency derivatives liquidity has dried up on NSE, the share of foreign institutional investors in gross futures turnover has also dropped—to 4% in May from 8.8% in 2023-24, NSE data show.

Retail investor share on NSE slumped to 5.6% in the June quarter from 15.2% in the January-March period. But the share of propietary traders has jumped to 80.2% from 66.6% of the turnover on India’s largest stock exchange.

Currency market experts explained that as RBI doesn’t allow resident individuals trading through the liberalised remittance scheme on overseas markets to use leverage, the FIIs who hedged their residual currency risk on NSE moved to SGX.

“FIIs trading in Indian equity markets hedged a large portion of their currency risk with foreign or Indian banks and a small or residual portion on Indian stock exchanges," said a currency derivatives broker requesting anonymity. “As volumes on NSE dried up after the RBI circular of January, some of them are hedging this on SGX as well."

Currency derivatives trading on NSE and BSE began in August and October of 2008, respectively. RBI’s recent decision means those trading without foreign exchange exposure would be in violation of India’s Foreign Exchange Management Act, 1999.

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