Non-USDINR Currency Futures

Contracts in India
Recently the Reserve Bank of India (RBI), which along with the Securities
and Exchange Board of India (SEBI, regulates the currency futures market), announced that
stock exchanges that currently offer futures trading in dollar-rupee can launch futures trading in
euro-rupee, pound sterling-rupee and yen-rupee with immediate effect.  Now corporate and
retails investors will now be able to trade in currencies such as euro, pound sterlling and yen.
This move was result of the banking’s regulator’s announcement of the need for more
exchanage-traded currency futures during the second quarter review of monetory policy in
october 2009. (Economic Times, Jan 20,2010)

But think for a second, what is the need of currency futures in India? What benefit do investors
get out of currency futures? And most importantly what is the reason behind the decision taken
by RBI to offer futures trading in Euro, Pound and Yen?

CURRENCY FUTURES IN INDIA

The Indian economy has been expanding rapidly and, so as Indian currency, over the last twenty
years. Innovations in its capital markets and financial instruments have also accelerated at a
similar pace. Eventhough India’s total foreign trade has quadrupled in just seven years( from
USD 95 billion in 2000-01 to USD 414 billion in 2007-08), however there are lots of changes
that need to be made to ovrcome the limitations in currency derivative contracts and
uncertainities such as increasing volatility in Indian forex markets. The availability of over-the-
counter (OTC) currency derivatives contracts has inherent limitations. The OTC markets could
not address the need of micro small and medium scale enterprises (MSME) for mitigating
currency risk. To bridge the missing link in the Indian financial markets and to make accessible
the benefits of exchange-traded currency derivatives to all the stakeholders of the economy,
especially small and medium enterprises, the regulators allowed simple yet effective instrument
in the form of USDINR futures (currency futures) to be traded on the domestic exchanges

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Moreover, Indian companies are buying foreign companies and are going abroad for availing
foreign loans/funds. So the exposure of corporate India to various currencies of the world is
being increasing either in payments or recieve. This had also accelerated the need for introducing
a full fledged foreign exchange derivative market in India in 2008.

The National Stock Exchange started currency futures trading from August 29, 2008. Currency
Futures means a standardised foreign exchange derivative contract traded on a recognized stock
exchange to buy or sell one currency against another on a specified future date, at a price
specified on the date of contract. (Report of the Internal Working Group on Currency Futures,
Reserve Bank of India, Central Office, Mumbai, 2008)

The Reserve Bank of India is apex authority issuing guidelines for currency futures market in
India. The Securities Exchanges Board of India is the currency futures market regulator. The
primary focus of the market is on the exchange rate relationship between the US Dollar and
Indian Rupee. Through brokers and sub-brokers retail investors can trade in INR-USD contracts.

Features of exchange traded currency future

 Initially only future contracts on US dollar- Indian rupee (INR) would be available. This
means, the investors can hedge themselves when the exposure is in US dollar only.
 Minimum contract size will be US dollars 1000.00.
 The currency future contract shall have maximum maturity of 12 months only. Of course
the contract of varied maturity from 1 month to 12 months will be available.
 The currency future will be settled in Indian rupees only.
 Settlement price will be RBI’s reference rate on the last trading date.

NEED FOR NON USD-INR CUTURRENCY FUTURES.

Since the inception of futures trading, more than 152 million USDINR futures contracts (single
side) have been transacted on MCX Stock Exchange alone (till October 2009), which is
equivalent to a trading turnover value of Rs 738,000 crore. Exchange-traded currency futures

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platform in India has established global benchmarks in effective and efficient currency risk
mitigation leading to better price discovery.

Despite the fact that 90% of Indian trade is conducted with economies other than the US, Indian
business had always found it comfortable to deal with USD
If the trading in USD-INR is making the process easy to price the products in USD than in
EURO, why did RBI came up with futures trading in euro, pound and yen?

Let us throw some light on the possible reasons as to why RBI has taken this major step

 Since currency futures were offered only in USDINR pair, the ones who are exposed to
USD/INR volatility could be protected. And the stakeholders of the economy having
exposure to the Euro, for example, are at a great disadvantage as they are not being able
to effectively hedge their currency risks directly on a Euro-INR pair in an efficient
market. It would be costlier to do a perfect hedge of EURO-USD and USD-INR
participation. Therefore, it is clearly evident that allowing to trade in EURO-INR futures
contract would enable them to mitigate their Euro risk and, thus, become increasingly
competent in the global market
 The US dollar has been depreciating in the last few months. There is a significant
liquidity overhang in the world economy owing to the policy of sustaining the global
meltdown. This is especially in the form of excess US dollars that have been printed to
fund the default in the OTC derivatives markets in the US. With the diminishing
importance of the US dollar in global trade, it is imperative for participants to not only
mitigate risk against the US dollar, but also against other major currencies.
 The European Union countries form the second most important trading region. There has
been as a 230 percent increase with over USD 69 billion (16.8 percent) of imports and
exports in 2007-08 than USD 20.92 billion in 2000-01. The entire North American
continent contributes USD 45 billion of India’s forex trade in 2007-08.
 Many OPEC countries are exploring options to change the currency for valuing their oil
assets from the US dollar to Euro, which is a more stable currency. With depreciation of
the US dollar, they prefer maintaining bulk of their currency assets in non-USD

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 currencies or even gold. This signifies a demand for a reliable alternate asset for
investment purpose. This has been majorly due to depreciation of the US dollar.

 Despite the fact that our corporates could have reaped the benefits of pricing their
goods/services in Euros, many would have opted for USD (except those who may have
compulsorily transacted in Euros due to their origin/destination requirements) as the
existing USD-INR OTC market helped them not only to plan their budgets ahead in time
but also to lock their currency rates through participation. An exchange traded Euro-INR
contract would not only have helped corporate forex earners to take advantage of the
strengthening trend in Euro in the pre-meltdown years but also we as net forex holding
economy would have better diversified our portfolio in Euro.

While nations are moving away from chasing the greenback to park their funds, it is right time
that in the interests of our corporate sector and in the interests of our economy, our regulators
examine the possibility of introducing Euro-INR rate contracts on the currency futures platform
with an entirely different contract from the one on USD-INR which is more focused on retail
clients. According to estimates by market players, around 20 per cent of the currency trades in
over the counter (OTC) market is done in non-dollar currency. this means the move will increase
volumes on the exchange platform manifold.

Trading in other currencies, particularly Euro-INR, has considering the huge volume of India’s
international trade with the EU, and the consequent transactions in the euro. More importantly,
the acceptability of the euro is increasing worldwide, in a scenario of diminishing importance of
the US dollar in international trade and finance over the last decade. Hence, trading in at least
two currencies simultaneously will stimulate arbitrage and further augument and deepen the
currency market, as also help commodity market functionaries.

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References

http://en.wikipedia.org/wiki/Futures_contract

http://www.forexsensor.com/why-do-i-need.html

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Foreign_exchange_market

http://www.commodityonline.com/news/Salient-features-of-Currency-Futures-in-India-10946-3-
1.html

http://www.sfu.ca/~mvolker/biz/futures.htm

http://en.wikipedia.org/wiki/Currency_future

http://www.investopedia.com/terms/c/currencyfuture.asp

http://www.dnaindia.com/money/comment_shed-obsession-with-dollar-hike-exposure-to-
euro_1294377

http://www.commodityonline.com/news/Salient-features-of-Currency-Futures-in-India-10946-3-
1.html

http://www.theforexhotspot.com/indian-forex-market-matures

http://www.taerindia.com/archives/october2008/10-14.pdf

http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/84213.pdf

http://www.ftkmc.com/pdf/Benefits-of-Launching-Non-USDINR-Currency-Futures-Contracts-
in-India.pdf

http://www.mfglobal.com/edudoc/UsingCurrencyFuturestoHedgeRisk.pdf