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Friday, April 13, 2007

INR trading outside India

INR-USD futures trading will start in two months in Dubai. I'm reminded of the Nifty futures, which first started trading at SGX, an event which probably had something to do with SEBI giving out permissions to NSE to trade Nifty futures.

If you have the MIFC book handy, I'd like to point you to (a) Page 127 which has the chronology of the license-permit raj in the story of Nifty futures trading; (b) Page 56 which has a full page box about Indian underlyings trading outside the country; (c) Page 46 which has a treatment of Dubai; (d) Page 152 on exchange vs. OTC trading; (e) Recommendation 45 (page 200) talks about rupee-settled currency futures.

MoF and RBI face the choice between having MCX/FT run an INR/USD currency futures market with DIFC regulation, or having an INR/USD currency futures market in India with SEBI regulation. With the huge growth of outbound FDI, a lot of Indian companies have global operations, and can place important risk management activities outside the countries. If the status quo - of currency futures trading being banned - continues, liquidity will increasingly shift to the INR NDF market or to this new currency futures product.

The edit in Financial Express says:

It had to happen. The Indian economy is becoming a powerhouse. So, too, the rupee. Ergo, the world becomes interested in the currency, and lo and behold, a world market for it emerges. How does such a market work? Suppose someone has an export contract payable in rupees two months from today. He can hedge the transaction against the payment going down in value against other currencies, by entering into a futures contract. It does not take an expert to tell us that such a market is critical for banks, traders and for anyone who deals in the Indian rupee. That tribe is growing pretty fast on the back of a rapidly globalising economy, with exports rising frenetically. Such transactions are critical to global financial markets, recording a daily turnover of about $270 billion. The scope of fee-based income for banks participating in these markets can be easily imagined. Yet, such a market is not permitted in India. So, it is hardly surprising that a foreign financial centre—in this case Dubai—has decided to plug the gap. Mumbai should have been the natural market for such contracts. According to reports, MCX has tied up with the Dubai Gold and Commodities Exchange to launch futures contracts on the Indian rupee to be operational from mid-June. Under RBI rules, such contracts may not be legal. But in this case, the RBI can hardly do anything, as contracts will be settled in US dollars.

With the rising profile of the Indian rupee, there has already been sporadic forward trading in derivatives with the rupee as the underlying tradeable unit in markets across the world (mostly non-deliverable, inter-bank deals). But since a futures contract is exchange traded, it is a superior financial product, and a transparent one, too. What’s more, as the RBI builds up a large defensive position on the rupee, the scope for hedging through a futures market in rupees has shot up dramatically. The biggest beneficiary of the new market will be Indian corporates, who are now increasingly exposed to global currency fluctuations. But, and this bears repetition, which financial centre should have led this move towards rupee trading sophistication? Mumbai, surely.

Today (17/4), there's an interesting story on this by Sanjiv Shankaran in Mint, where he says:

The government is considering introducing trading in rupee futures contracts on stock exchanges, a move that will bring the country a step closer to full convertibility of the rupee on the capital account of balance of payments.

Accordingly, the finance ministry will be asking the Reserve Bank of India (RBI) to explore the possibility of putting this in place at the earliest. Futures contracts are a commitment between two parties to effect transactions at a preset price and date.

The move is expected to usher in unprecedented transparency and liquidity in the country’s foreign currency market. At present, Indian corporates and banks hedge their foreign exchange positions through forward contracts in an over-the-counter (OTC) market, which are decentralized markets, unlike stock exchanges where all orders are matched electronically and in a transparent manner.

The finance ministry has decided to revisit the idea after the Dubai Gold & Commodities Exchange (DGCX) last week announced it would list rupee futures contracts in June, the first time a rupee futures contract will be traded on an exchange.

Allowing similar trades on an Indian stock exchange requires just an executive notification and no legislative changes, said a senior official of the finance ministry, who did not want to be named.

Indian stock exchanges can offer futures contracts, which can be settled at the time of expiry in rupees, the official added. Unlike DGCX’s rupee futures contracts, which are to be settled in US dollars.

The finance ministry wanted to make a broad policy announcement on the introduction of rupee futures contracts in stock exchanges during the course of the finance minister’s budget speech in 2006, said the official. The announcement did not take place as RBI felt the market was not yet ready to trade in rupee futures.

The DGCX move is a sign that RBI needs to loosen controls as forces beyond its control would begin to influence India, said Jamal Mecklai, CEO of Mecklai Financial, a forex advisory. “You cannot control markets when they start doing things outside what you are permitting,” he said. “It (DGCX’s move) is a loud sign that you need to accelerate your deregulation several notches; if you don’t, you will not only lose business to other centers but, far more important, you will have bouts of unmanageable volatility in your domestic market which will make it progressively more difficult for Indian companies to manage risk.”

There has been a historical precedent where external developments have prompted the government to fast-track its policy. In 1995, the National Stock Exchange (NSE) asked the capital market regulator, Sebi, for permission to start trading in stock index futures. Permission did not come through quickly and on 24 May 2000, Singapore’s SIMEX chose the Nifty, the exchange’s benchmark index of 50 stocks, for derivatives trading on an Indian index. Sebi then allowed NSE and the Bombay Stock Exchange to trade in index futures the next day.


The global currency futures market, though small when compared to a currency forward markets, is still very significant. Despite forward markets accounting for the maximum trade volumes, some studies show that 85% of price discovery in forex markets are on account of futures markets, said the recent report of the high powered expert committee which looked at ways to transform Mumbai into an international financial centre.


  1. The RBI is very conservative when it comes to opening up the currency markets and the reasons for this are very difficult to understand. Countries like New Zealand and Singapore have opened their currency markets and there is no reason why India should not open up as any negative impact on the rupee ( as Ms.Shymla Gopinath was trying to paint in the forex conference speech) is limited. We can now only pray that better sense prevails.

    Our trade and borrowings and various other receipts it is USD 500 Bn per annum and it is 50% of GDP. Keeping rupee at an artificial levels and not allowing various hedging instruments is giving opportunity for making money (abroad for MNC banks and now exchanges) at the expense of domestic Indians. This should be stopped and RBI should stop micro management of exchange rates. The sooner the better.

  2. Kindly correct above articals as i know the INR will be setteled in EURO not in USD.

  3. Interesting post. Very informative and well written. This will help me improve by insight about trading.

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