CURRENCY FUTURES IN INDIA – WAY FORWARD

Dr. K. Sriharsha reddy

Mrs. C. Prashanthi

Introduction

India’s financial market has been increasingly integrating with the global markets
through increased trade and finance activity, giving rise to a need to permit a variety
of hedging instruments, other that OTC products, to manage exchange risk. With
electronic trading and efficient risk management systems, exchange traded currency
futures are expected to benefit corporates and individual investors exposed to foreign
exchange risk. In this paper an attempt is made to enumerate significance of currency
futures in hedging exchange rate risk and highlight trends in currency futures trading
in India.

A Currency future is a forex derivatives contract to buy or sell one currency against
another on a specified future date, at a price decided in the contract. Globally,
currency futures market is one of the largest financial market with over $2 trillion
turnover per day, largest over the counter market (OTC) with only 10% contribution
from exchanges, largest trading centre being London, accounting for 30% of all trades
across the globe and dominant trading currency is dollar accounting for 85% of the
trades in currency futures [(Bank of International Settlement(2009) and Wikipedia
(2010)].Currency futures are considered to be most transparent, efficient and
accessible way to manage forex risk.

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Evolution of Currency Futures in India

Currency futures in India were launched on August 6th, 2008 following the
recommendations made by Standing Technical Committee (2008) jointly constituted
by RBI and SEBI. This report laid down the framework for the launch of Exchange
Traded Currency Futures in terms of the eligibility norms for existing and new
Exchanges and their Clearing Corporations/Houses, eligibility criteria for members of

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such Exchanges/Clearing Corporations/Houses, product design, risk management
measures, surveillance mechanism and other related issues. Persons resident in India
are permitted to participate in the currency futures market in India subject to
directions contained in the Currency Futures (Reserve Bank) Directions, 2008.

Standardized currency futures have the features such as, first, USD INR, EUR INR,
JPY INR and GBP INR contracts are allowed to be traded. Second, the size of each
contract is - USD 1000, EUR 1000, GDP 1000 and JPY 1,00,000. Third, the contracts
shall be quoted and settled in Indian Rupees. Fourth, the maturity of the contracts
shall not exceed 12 months. Fifth, the settlement price shall be the Reserve Bank’s
Reference Rate on the last trading day and sixth, the futures contracts are cash settled
on maturity date.

The membership of the currency futures market of a recognised stock exchange has
been mandated to be separate from the membership of the equity derivative segment
or the cash segment. Banks authorized by the Reserve Bank of India under section 10
of the Foreign Exchange Management Act, 1999 as ‘AD Category - I bank’ are
permitted to become trading and clearing members of the currency futures market of
the recognized stock exchanges, on their own account and on behalf of their clients,
subject to fulfilling certain minimum prudential requirements pertaining to net worth,
non-performing assets etc. NSE was the first exchange to have received an in-
principle approval from SEBI for setting up currency derivative segment. The
exchange lunched its currency futures trading platform on 29th August, 2008. While
BSE commenced trading in currency futures on 1st October, 2008, Multi-Commodity
Exchange of India (MCX) started trading in this product on 7th October, 2008.

Currency futures in Indian markets benefitted investors to hedge against foreign

exchange risk at affordable price with lower margins and small contract size.
Currency futures are beneficial for retail investors with limited resources to take
positions. Contracts with daily Marking to Market (MTM) makes it easier for
participants to account for P&L in books. Counter-party risk is eliminated as all trades
done on recognized exchanges which are guaranteed by NSCCL (National Securities
Clearing Corporation Ltd.).

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Trends in Currency Futures Trading In India

The Currency Derivatives Segment (CDS) on the NSE has witnessed high growth
over the first ten months of introduction (September 08 to June 09). The volumes in
this segment have increased by 1200% in June 09 compared to September 08 levels.
The average daily turnover on the NSE stood at Rs 34,256 mn in June 09 and open
interest was 267400 contract (or Rs 1285 mn) as at end June 09.

Trading in Currency Futures segment commenced on August 29, 2008. On the very
first day of operations a total number of 65,798 contracts valued at Rs.291 crore were
traded on the Exchange. Since then trading activity in this segment has been
witnessing a rapid growth. The total traded volume from August 2008 till March 2009
was Rs.162,272 crore (US $ 31,849 million). Total number of contracts traded during
the August 2008 to March 2009 were 32,672,768. The business growth of Currency
Futures Segment is shown in Table 1 and Chart 1.
Table 1: Business Growth of Currency Futures at NSE
Month/ Year No. of Trading Trading Open Interest
Contracts Value Value No. of Trading Trading
Traded (Rs. Cr. (US $ mn) Contracts Value Value
Traded (Rs.Cr.) (US $ mn)
Sep-08 1,258,099 5,763 1,131 90,871 428 84
Oct 08 2,275,261 11,142 2,187 170,202 851 167
Nov 08 3,233,679 15,969 3,134 146,262 737 145
Dec 08 4,681,593 22,840 4,483 177,520 867 170
Jan 09 4,900,904 23,980 4,707 254,797 1,247 245
Feb 09 6,416,059 31,761 6,234 315,317 1,612 316
Mar 09 9,907,173 50,817 9,974 257,554 1,313 258
Aug 08 - Mar 09 32,672,76 162,27 31,849 257,554 1,313 258
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Chart 7-1 : Business

Chartrrgergergergdgfbfngn business growth of currency futures in

NSEChart 7-1 : Business Growth of Currevgrgncy Futures at NSE7-1 :
Business Growth of Currency Futures at NSE