Coming soon: Rupee futures on CME, ICE

Tags: Currency

Indian groups, FIs may flock to offshore market

In a move that could see a gradual shift of the onshore currency market to offshore, two leading global exchanges — Intercontinental Exchange (ICE) and CME Group — will launch foreign exchange futures contracts on the Indian rupee on January 22 and 28, respectively.

Already, an over-the-counter (OTC) USD-INR non-deliverable forward (NDF) offshore market for trading in currencies that have no full convertibility, such as the Indian rupee, is in existence, but experts reckon that the launch of standard rupee futures contracts on the two American exchanges will lure foreign investors, who are now prohibited from participating in the Indian OTC and exchange-traded markets.

An active rupee futures market in CME and ICE may also attract big Indian conglomerates with strong global footprint to hedge their currency risk in these overseas exchanges, rather than in the Indian market, to save on tax, improve margins and lower transaction charges, they said.

At present, the Dubai Gold and Commodities Exchange (DGCX) is the only overseas exchange that offers rupee derivative contracts, where average daily volume and open interest rose from barely Rs 38 crore and Rs 41 crore, respectively, in April 2009 to Rs 8,511 crore and Rs 3,035 crore, respectively, in October 2012. In India, daily exchange-traded currency turnover (both NSE and MCX-SX) stands at Rs 40,000-50,000 crore.

A competitive race to attract volume from deep-pocketed non-Indian investors for rupee futures by the two US exchanges may result in creation of a vibrant rupee market outside India, where the Indian central bank, the Reserve Bank of India (RBI), has no say, said experts.

In an email response to Financial Chronicle, Bro­okly McLaughlin, communications manager at Intercontinental Exchange, said listing the India rupee contract was recognition of the significant and increasing commercial importance of India and was a response to interest in emerging market non-deliverable forward currencies from a range of market participants.

“Another indication of the growing interest in trading the Indian rupee is the activity in the over-the-counter FX market, where rupee is certainly among the more actively traded of the emerging market currencies. As the first US exchange to list a rupee contract, we are offering ease of doing business in a regulated futures environment for execution and clearing,” she said.

CME Group did not respond to a query from Financial Chronicle. But K C Lam, executive director of FX products, in a post on its website, explained the advantages of an exchange-traded rupee contracts. “There exists a USD-INR over-the-counter offering, but the new contracts provide an opportunity to trade in both a standard-sized contract with a notional amount of Rs 50 lakh and an e-micro contract one-fifth of the standard-sized contract. We believe the two contract sizes will bring about greater precision for hedging currency risk and enhanced trading flexibility.”

The overall Indian rupee market is around $25.5 billion a day, a growth of 42 per cent during the past two years, Lam said, quoting the 2010 BIS Triennial Central Bank Survey. “The rupee, like most currencies of export-oriented Asian countries, will likely be the beneficiary of global reflation and rebalancing,” he said.

When contacted for comments, a senior RBI official, who did not want to be identified, said: “We are aware of these two US exchanges coming up with rupee futures contracts. But we don’t expect the volumes to be too high to have a direct impact on our currency markets. There is already an INR exchange-traded futures trade on the Dubai exchange. Besides, they can be traded only by foreigners and not by Indians. These markets work in different time zones, so the influence will not be real time. Of course, now spot trades in the forex market pick up cues from the NDF market, but finally, the conditions of the domestic economy will influence the level of the rupee, not the NDF market.”

The RBI official also explained the steps taken by the central bank to increase access for foreign investors in Indian markets. “We are trying to increase access to onshore markets by foreigners. RBI has allowed rupee hedging by foreigners who trade in India. For the export-import trade, hedging is allowed if one of the currencies is rupee.”

Ajay Shah of National Institute for Public Finance and Policy (NIPFP), writing in his blog, pointed out that even though China is a much bigger economy than India, rupee trading was 0.9 per cent of global currency trading while RMB (renminbi) trading was at 0.7 per cent. Similarly, it appears that the INR NDF is bigger than the RMB NDF. “Something is going right in the growth of the rupee as a big currency by world standards,” he wrote.

Aakriti Mathur, also of NIPFP, who is collating data on global INR trading, told Financial Chronicle that big Indian conglomerates, through their overseas units, would prefer hedging their currency risks in US exchanges and move away from India to take advantage of lower margins, zero transaction costs and different (and friendly) tax structure in the US exchanges. This would prove costly for SMEs (small and medium enterprises), who have to deal with higher costs and larger spreads in India.

Jamal Mecklai, a currency expert and chief executive officer of Mecklai Financial, said the INR-dollar exchange-traded futures in the two US exchanges may lead to cannibalising the NDF market. “There could be two reasons why the exchanges are coming up: it is a sign that the rupee is getting globalised and investors may not be happy with the spreads they are getting from the NDF market. Besides, the NDF market is a wholesale market, these exchanges probably may meet the retail demand for these instruments,” he explained.

The fully convertible Indian currency means that the rupee would be made freely exchangeable into other currencies and vice-versa. The rupee was made partially convertible in 1994. At present, it can be changed freely into foreign currency for business and trade expenses, but not freely for activities like acquiring overseas assets.

Already, a growing number of India-specific financial products have a big market outside the country, and out of the regulatory purview of Indian regulators. For instance, futures contracts on India’s bellwether equity index Nifty are attracting huge volumes on Singapore Exchange (SGX). The open interest position (outstanding positions) on Nifty on SGX last year crossed the OI position for Nifty on the National Stock Exchange, the real home of the index. Similarly, participatory notes (P-notes) wherein unregistered investors bet on Indian stocks outside the country, stood at Rs 177,164 crore or about 14 per cent of total foreign portfolio investment into the stock market.

Shah of NIPFP said a process is afoot, at present, through which the Indian financial system is being “hallowed out”. “If this process runs unchecked, RBI and Sebi (the Indian securities regulator) will be left lording over nothing. There is a need to reverse this policy framework of reverse protectionism,” he wrote.


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