Search interesting materials

Saturday, June 16, 2012

Trading in the rupee: Starting to look like serious numbers

by Vimal Balasubramaniam and Ajay Shah.

The rupee-dollar is the most important price of the Indian economy. It is discovered on the currency market. What are the contours of this market? Specifically:
  1. How big is the daily trading in the rupee?
  2. Where does the rupee stand, in global rankings of currencies?
  3. Where does trading take place?
  4. Where are we on the onshore versus offshore distinction?

How big is the daily trading in the rupee?

Trading in the rupee is composed of the following elements of the market:

Onshore Options, futures Spot, forwards, swaps, options
Offshore Futures Forwards, swaps, options

We attempt an estimate of turnover across all components, on 25 May 2012:[1]

Location Billion USD

OTC Spot (onshore) 19.82
OTC Forwards (onshore) 4.40
OTC Swaps (onshore) 11.34
Exchange Futures (onshore) 7.02
Exchange Options (onshore) 1.45
Exchange Futures (offshore) 1.17 [a]
OTC (offshore) 20.03 [b]

Total 65.23

Source:- RBI Weekly Statistical Supplement, NSE, USE, MCX-SX, DGCX, and BIS Survey (Tables D.1.1 and D.1.2)
[a] DGCX data as on June 6, 2012 for May 2012.
[b] This is the April 2010 BIS survey valuation of the offshore market, adjusted for the DGCX daily average value (estimated from overall value of futures contracts) for April 2010.

This is an under estimate for two reasons. Data for one important element (offshore OTC) pertains to April 2010; the market must have grown since then. Data from the BIS is likely to not capture activities of non-bank players.

Three interesting facts come out of this. First, that the overall market for the rupee is roughly $70 billion a day. Second, that roughly one-third of it is spot, and the rest is derivatives. Third, that rougly one-third of it is offshore.

Growth in recent years has been tremendous. In May 2000, the onshore market did only $2.7 billion a day. That is, we've got 24x growth over 12 years.

Where does the rupee stand, in global rankings of currencies?

BIS surveys global banks and reveals interesting data about the currency market. However, it is likely that the BIS misses out on a great deal of non-bank activity. If a hedge fund sends an order to an exchange, this is likely to elude the measurement of the BIS.

According to the BIS, in April 2010, the daily average turnover for the INR against the USD was a total of U$41.7 billion. [2] INR then ranked 15th (spot), 10th (forwards) and 22nd (swaps) in a pool of 28 currencies covered in this BIS survey. Summing up, the rupee stood at rank 16 in their group of 28 currencies. In the class of emerging markets, the rupee ranked fourth, third and ninth in the spot, forwards and swap markets respectively:

Ranking among EMs

Currency Spot Forwards Swaps
Korean Won 1 1 3
Mexican Peso 2 6 1
Russian Ruble 3 12 5
Indian Rupee 4 3 9
South African Rand 5 9 4
Brazilan Real 6 4 14
Chinese Renminbi 7 2 8
Turkish Lira 8 8 6
Polish Zloty 9 7 2
Taiwan Dollar 10 5 11

Source:- BIS Survey, Tables D.1.1 and D.1.2

The BIS triennial survey included the INR since 1998. The three-yearly snapshot of Rupee's position marks its rise over time. Measuring only the spot market, the rupee ranked 13 (tied with Hungary, Indonesia and Chile) in 1998 and moved to the third position in 2010. In terms of change, the rupee has moved dramatically, perhaps, with no other currency witnessing such rapid change.

Emerging market currencies rank: spot market

Economy 1998 2001 2004 2007 2010
Russia 2 1 1 1 1
Korea 6 2 3 2 2
India 13 10 6 3 3
Brazil 3 4 6 7 5
China 16 18 17 5 5
Chinese Taipei 6 6 4 4 6
Mexico 2 4 2 7 8
Turkey 18 17 17 18 8
Malaysia 16 17 17 13 10
South Africa 4 10 9 8 10

Source:- BIS Survey, Table D.19

The most surprising feature of these results is the extent to which the rupee is a bigger market than the CNY, even though Chinese GDP and internationalisation exceed that of India. It seems to suggest that you'd have to do bigger trades to obtain a 1% change in the INR/USD rate, when compared with the trade size required to obtain the same change with the CNY/USD rate. This helps us see why India has moved into greater exchange rate flexibility when compared with China: there was really no choice.

Where does trading take place?

For the first time, Table D.6 of the triennial survey provides information about where currency trading takes place. A surprisingly diverse set of locations light up:

Location of the currency market (% of turnover)

India -- -- 50.02 0.00 0.04
Australia 0.51 0.44 0.31 0.50 1.20
Brazil 29.68 0.01 0.00 0.01 0.07
Canada 4.66 1.36 0.15 0.18 0.39
China -- 24.87 -- 0.00 0.06
Hong Kong SAR -- 27.29 10.91 10.33 --
Japan 0.05 0.28 0.21 0.19 4.65
Korea 0.05 0.03 0.02 52.13 0.02
Singapore 1.07 19.01 16.12 21.01 1.18
United Kingdom 19.18 17.29 12.32 10.98 36.43
United States 37.53 7.72 9.26 3.95 8.36

Source:- BIS Survey, Table D.6

Where are we on the onshore versus offshore distinction?

As the table above suggests, roughly half of rupee trading takes place in India. The issues which shape this onshore versus offshore market share are likely to be similar to those seen with Nifty. Recent events are likely to have driven the share of the onshore market to below 50%.

The onshore OTC market consists of forex spot transactions, forwards and swaps. The RBI publishes information on turnover in the onshore spot and forward market and the forward and spot legs of the swap transaction are captured in this data as well. An RBI report on OTC derivatives in 2011 highlights that OTC derivative turnover was 3.53 trillion USD in FY2009-10. Out of this, forex swaps account for over 60% of the total turnover in the same period. Here is the time series for the onshore OTC market:

Source: RBI, Weekly Statistical Supplement (1996 - 2012)

Exchange-trading of the rupee, in India, started in 2010. At a point in time, turnover in exchange-traded currency futures did seem to have overtaken the OTC forward market. The USD-INR futures contract on MCX-SX, NSE, and USE with a contract size of USD 1000 occupied the first three ranks for volume in the world in 2010 and 2011. The USD-INR options contract on the NSE ranked fourth while the EUR-INR futures on the NSE also featured in the top 20 forex futures contracts in the world. The collapse in the following graph, which shows exchange traded onshore turnover, is associated with the CCI order:

Source: NSE, MCX-SX, and USE

Putting together the information from the onshore exchange-traded market (options, and futures) and the onshore OTC market (spot, forward, swaps data from the RBI), one gets a complete picture about the onshore INR market:

Source: RBI, NSE, MCX-SX, and USE

The most recent BIS triennial survey (April 2010) had placed the onshore market (USD-INR) at about U$20 billion. As the graph above shows, current values are more like U$30 billion a day. The offshore market is likely to have grown more, giving total INR turnover of well above U$70 billion a day. This puts the Indian rupee today above the Korean Won as of April 2010.


The Indian rupee has grown rapidly to becoming the sixteenth most traded currency in the world. From less than 0.2% of the world forex turnover in 1998, it has grown rapidly to constitute about 0.9% of the world forex turnover in April 2010. It is one of the biggest emerging market currencies with the Korean Won, Russian Ruble, Chinese Renminbi and the Mexican Peso being its close competitors. The offshore market today is as big as the onshore market, as is seen by other EMs. Today, the rupee does roughly $70 billion a day, roughly where the biggest EM currency (the KRW) was in 2010.

These developments have many ramifications:
  1. The rise of a large currency market is consistent with India's rapid integration into the world economy of recent decades.
  2. When a market does turnover of $70 billion a day, market manipulation is difficult. Manipulating the rupee is now as hard as manipulating Nifty: both are large globally traded products with highly liquid markets. This is the essence of India's evolution away from an INR/USD pegged exchange rate to a mostly-floating exchange rate: the monetary policy distortions required to support manipulation became too large.
  3. As with Nifty, mistakes of domestic policy are giving a substantial shift in India-related finance to overseas locations. The two most important pillars of the Indian financial system are trading in the rupee and in the Nifty, and with both these, India is rapidly losing ground. If present policy mistakes continue, the role of the onshore market will continue to decline, for both the rupee and Nifty.
  4. In the last 12 years, there was 24x growth. Suppose there is only 10x growth in the next 10 years. That would take us to $700 billion a day, which would be quite something.
  5. Looking into the future, if India is able to continue on the course of high GDP growth and integration into the world economy, the rupee will become a big currency by world standards. The big four currencies today are the USD, EUR, JPY, GBP. It is not inconceivable to think of CNY and INR joining that club. This could connect nicely with a role for India in global finance. But for all these good things to happen, we have to put our house in order.


[1] Forward market turnover is estimated as purchase + sale - cancellation.
[2] The BIS survey also does cross-border netting - something that we cannot adjust for from the RBI data. However, as Jayanth Varma points out, this may not be a very large number that the overall calculations dramatically change.


  1. Thanks! Exciting information and amazing growth in rupee trading! The market now has a bigger say on macroeconomic policy (monetary and fiscal) via the price it sets for the rupee. The perennial cynic in me hopes that this is not a peak from which the govt and RBI walks down. Its been so hard to get here. Far longer than you would imagine for a democracy.

  2. Ajay Sir,

    Assuming that the total daily turnover for USD/INR is $70 bio and fx reserves are $280 Bio, can we derive how much dollar RBI should sell approximately to appreciate INR by 1% say from 56 to 54.94..


    Rahul Krishna

    1. (a) I don't know.

      (b) Ila Patnaik and I have a paper on exchange market pressure, embedded in which there are some estimates of this nature.

      (c) This is the field of market microstructure. A large order can generate a large instantaneous change. In a short while, the market realises that it was an informationless order and we get a reversion of liquidity & price back to the unshocked conditions. It is a difficult field. Relatively little is known about the subject of market resiliency.

  3. Clearly India can and should do more to facilitate onshore market development, but it's not doing so badly by EM peer comparison. In your BIS market share table India is second only to Korea in onshore market share (counting HK as offshore for China). Do we know what drives offshore activity in other EMs?


Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.