Transcript of speech by P. Chidambaram at the launch of currency futures trading at NSE, 29 August 2008

Smt. Shyamala Gopinath, Deputy Governor of the Reserve Bank of India, Shri Bhave Chairman SEBI, Shri S B Mathur Chairman NSE, Shri Ravi Narain Managing Director and CEO NSE, Smt Chitra Ramakrishna, Mr. Justice Shri Krishna, Chair persons of Banks, Shri K P Krishnan, Joint secretary Ministry of Finance, Distinguished guests, Ladies and Gentlemen.

It's a proud day today and I stand before you to dedicate to the financial services community, a new product - Currency Futures. May I begin by warmly thanking the Reserve Bank of India and Securities Exchange Board of India for jointly developing this product and I congratulate the National Stock Exchange for having the distinction of being the first exchange to commence its trade. I wish all success to NSE and I am hopeful that the other two exchanges which have received in-principle approval and other exchanges will soon offer this product.

I see before me on the screen the first trades that is being put through. I am not a trader and I can't qualify ever to become a trader, but if it makes any sense and I am sure it does to a large number of you. Someone is buying at 43.8250 and someone is selling at 43.8400, hope one of them at least makes a profit.

In the budget speech for 2008-2009, I said, and you will allow me to quote:

We propose to take measures to develop the Bond, Currency and Derivatives markets that will include launching exchange traded currency and interest rate futures and developing a transparent credit derivatives market with appropriate safeguards.

As you are aware the above proposal emulated out of one of the key recommendations of the high powered expert Committee on making Mumbai, your city, our commercial capital, an international financial centre.

That Committee had pointed out that Indian IFCs handicapped by three key markets that are missing in India's financial system, namely (1) Properly Functioning liquid corporate and sovereign bond market (2) Spot currency trading markets and (3) Broad derivatives markets that include exchange traded as well as tailored derivatives for the management of currency, interest rate and credit default risk.

Similar recommendations have been made by other Committees such as the Patil Committee, the Parekh Committee and the Raghuram Rajan Committee.

Therefore, the budget announcement proposed on BCD nexus the following: (1) Launch of Exchange traded currency futures and that is what we are doing today. I am glad that we have been able to implement a budget proposal within six months of the proposal.

The BCD nexus has to be taken forward the launch of exchange trade interest rate futures, the development of credit derivatives markets to remain on the agenda and I request the Reserve Bank of India and SEBI to work together to implement these budget announcements as early as possible.

In today's globalised and integrated business environment, many entities are impacted by currency risk either directly or indirectly. Exchange traded currency futures market provides an excellent opportunities to hedge currency risk for different kinds of participants.

The electronic nation wide trading facility, with the backbone of efficient clearing mechanism and efficient risk management system, will benefit universal participants including corporates, banks and individual investors.

As Shri. Ravi Narain mentioned, currency futures contract will be allowed, to begin with, only for USD / Rupee. and for participations by Indian residents. The regulations would with experience gained in the functioning market, consider how and when it can further open up for trading in other currencies as well as for permitting participation by foreign institutional investors and non-resident Indians. I see this as an important step towards going forward on financial innovation in the country. History shows that financial innovation has been a critical and persistent part of the economic landscape over the past few centuries.

Financial markets have continued to produce a multitude of new products including many new forms of derivatives, alternative risk transfer products, exchange traded funds and variants of equity. We in India have adopted all these slowly, some of these products but with considerable success. However, I may note that many years after these ideas were mooted we had to wait. For example, stock index futures took 5 years to be offered to investors after it was first conceived; exchange traded funds for Gold took 4 years to become a reality; interest rate derivatives though launched in 2003 have not taken off. These experiences highlight the risky environment that financial innovation faces in this country. This should change.

Galileo I believe said doubt is the father of invention; if I may add, doubting Thomases are impediments to progress.

We need to continue to innovate and improve in the design of financial products, its customer service as well as all India delivery. I hope this will be kept in mind when regulators review the next steps on the exchange traded futures markets. I urge them to move rapidly and with an open mind that are necessary in such situations. After having launched currency Futures we need to revitalize the exchange traded interest rate derivatives market. We need to offer exchange traded credit derivatives and we need to strengthen the corporate bond market. These three products are high on the priority list of government and I ask the co-operation and support of RBI and SEBI and others to move forward rapidly. These 3 markets are important (Bond, Currency and Derivatives), it is important that these markets develop rapidly in-order to attract domestic and foreign participation have vibrant trading in spot and derivatives, have healthy speculation and arbitrage to ensure liquidity.

As Shri. Bhave cautioned, some of these products are indeed complex. But the complexity of the products should not deter us from making a beginning. Everybody has a responsibility to explain the complexity of the products to the customers, so that the customers can chose the products that he or she desires. We need to draw the right lessons from developments around the world. We need to innovate, while the same time we need to ensure that the complexities are understood, the risks are mitigated and there is reward for those who are willing to take the risk.

As the Deputy Governor mentioned the foreign exchange market in India has acquired a distinct vibrancy as is evident from the range of products, participation, liquidity and turnover. According to figures with me, the average daily turnover in the foreign exchange market which was about 25.8 bn US $ during 2006-07 has increased to 48.1 bn US $ during 2007 - 08 reflecting large cross border trade and capital flows.

Finally, let me conclude by saying, the financial sector needs to be opened up to greater competition so as to be able to provide a world class financial services at competitive rates. We should work towards removal of entry barriers to domestic corporate player and foreign financial firms in all segments of the financial services industry.

The most successful parts of Indian finance, I may say, are those in which non institutional participants have taken a lead and engaged in healthy speculative price discovery. This large mass of retail participation in financial markets is a unique edge that India has when compared with other international financial markets. However, considering that we are striving to project Mumbai as an international financial centre, the capabilities and strength of institutional investors also need to be harnessed.

This class of investors, (the institutional investors) brings with it sophisticated analytical tools and quantitative techniques, pools of capital and helps link Indian finance with the rest of the world. Thus our strategy should be to remove constraints on the Institutional investors to allow them to reap the benefits of financial market innovations and in turn assist these markets with depth and liquidity.

Globalization, ladies and Gentlemen is no more a choice, it is an opportunity for developing countries. It is an inevitable reality for all countries of the world. Today international financial markets are becoming increasingly integrated. London and New York are the world's premiere financial centers. Closer home we see Singapore, Hong Kong and now more and more Dubai, playing the role in Asia. Where does that leave us? Where should we position ourselves? We have the potential in us to develop Mumbai as a great centre of international financial services.

The Percy Mistry Committee report and the Raghuram Rajan Committee report had laid out for us the road ahead for India's financial system. To prepare the system for the challenges of the future, some of the themes of these reports are what I have touched upon in my brief speech this morning. And hope that the regulators will take the clue from here and herald the next generations of financial sector reforms and put India in a league of nations known for their financial markets.

Congratulations to all of you. Thank You.