Coming soon: Exchange-traded rupee futures

MUMBAI:17 Nov, 2007,

Indians may soon be allowed to participate in exchange-traded currency futures — instruments that allow them to take positions on the future value of the rupee. The Reserve Bank on Friday released a report by an internal panel which has recommended the introduction of currency futures to be traded on dedicated exchanges.

The recommendations could spark off a turf war as it proposes that RBI will retain the right to regulate all aspects of trade even though securities exchanges are the domain of capital market regulator Sebi. A currency futures contract is one where two parties agree to buy and sell the currency at a future date at a pre-determined price.

Exchange-traded currency futures are seen as a stepping stone towards capital account convertibility as they allow individuals to hedge against foreign currency risks. The futures market is sought out primarily by people seeking information on price, speculators and hedgers. The RBI panel has recognised that the requirement of an underlying exposure to trade in a foreign exchange market is difficult to implement.

The panel has recommended that no quantitative restrictions may be imposed on residents intending to trade in currency futures, so that there is greater liquidity and wider participation. For those who have a currency exposure but not access to hedging tools like forwards and options, exchange-traded currency futures will be hugely beneficial. The rupee, which has risen from 44.25 levels to 39.30 levels in a span of six months, has proven to be nightmarish for several sections of the market. Individuals are also exposed to foreign currency risks with RBI allowing individuals to invest up to $1,00,000 abroad in a year.

However, there could now be some respite from the appreciating local currency, given that Indians may now be able to hedge their dollar positions. Non-resident Indians (NRIs) and foreign institutional investors (FIIs) could use currency futures only for hedging purposes and not for speculative reasons. For starters, the panel has recommended that the futures contract be denominated only in the US dollar-rupee terms, with a view to provide market participants with an additional hedging tool. For non-residents, the panel is of the opinion that participation be permitted over a period of time.


The group has suggested that NRIs and FIIs be allowed to participate for hedging purposes, once the robustness of various systems such as surveillance, monitoring, reporting etc. are ascertained. However, the group has called for suitable position limits to be prescribed for such entities. The central bank has fixed the size of a contract at $1,00, with a tenor of up to 12 months, with a view to allow for price discovery and trading.


As far as settlement of contracts are concerned, the RBI panel has said that at least during the initial phase, the transactions should be settled in terms of cash and this would be based upon the spot reference rate declared by RBI. However, the panel recommended that even though the introduction of currency futures could involve the role of different exchanges, which would be regulated by Sebi, the central bank should continue to act as the regulator.


The panel also calls for RBI to have the right to specify participants or even fix position limits for them. The RBI panel has suggested that to ensure a clean regulatory and supervisory structure, it is preferable to have an exchange, which is exclusively dedicated to trading in currency futures. The panel has suggested that existing exchanges which meet the eligibility criteria could take up the initiative to set up such exchanges. The panel has mooted the idea of allowing banks to function as direct members of the exchanges, while brokers meeting the eligibility norms may also be permitted to act as intermediaries.


In a bid to prevent unhealthy competition amongst exchanges, the panel has recommended that in the initial phase, the futures contract must take the form of a standardised product across various exchanges. This would help have a uniform contract size, settlement dates, procedures and tenors of the contracts.

By Shamsheer (ET0