The Reserve Bank of India’s decision to permit foreign investors to participate in the exchange-traded derivatives segment is deemed as a key positive measure, which could enhance the liquidity of this platform. In its latest credit policy, RBI announced that global investors are allowed to participate in India?s exchange-traded currency derivatives market to the extent of their underlying exposures plus an additional limit of $10 million.
Experts believe the RBI?s directive will increase the depth of the currency derivatives platform on which futures and options on the rupee denominated currency pairs are traded on domestic exchanges like, NSE, MCX-SX, BSE and United Stock Exchange (USE).
According to Abhijit Sarkar, a fund manager with Hong Kong-based Hamon Investment Group, the measure is a step in the right direction and will attract flows into the country.
?Over a period of time, we can expect transactions to increase and this will help investors make a favorable risk assessment given that their underlying exposures can then be covered,? added Sarkar.
Experts believe amid a renewed interest in the Indian capital markets after Narendra Modi-led BJP government came in power, the measure would further increase the scope exchange traded currency derivatives.
?The policy also allows domestic institutions similar access to the regulated currency derivatives and would lead to higher participation in the products,? said Navneet Damani, AVP, Motilal Oswal Commodities.
However, market experts believe a relaxation in the positional limits imposed in July 2013 may be required for the positive impact to be visible on the market activity. While trading members including brokers are currently allowed to have an exposure of upto $50 million individual clients are allowed to take positions not exceeding $10 million.
?The ceiling on client and member-level positions are not very encouraging currently. Especially due to the positional limit for clients, corporates shay away from using these products given that their currency exposures have increased substantially in the last two years,? said a senior official at a domestic broking house.
Currently, exchanges offer futures on all four majors against the rupee (USD-INR, EUR-INR, GBP-INR and JPY-INR) while options are available on the USD-INR pair. In May, the combined average daily turnover of NSE and MCX-SX, the two leaders of the segment, stood at R14,730 crore, down by about two-thirds from R62,910 crore of trading activity seen in June 2013.
A decline in the rupee volatility has also reduced the activity in the market after the rupee retreated by more than 13% from an all-time low of 68.825 against the dollar in August last year. While between June and November, the average swing in the rupee value was about 1% of the previous day’s close, it has come down to 0.5% in the last six months.
