Cashing in on currency

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Forex reserves up $1.52 billion

: The move to introduce exchange-traded currency futures has been long overdue. It was in 2007 that a panel appointed by the Reserve Bank of India (RBI) had recommended that trading in currency futures should be introduced at dedicated exchanges. After all, the sign of an evolving economy, it reasoned, was the existence of both a spot and futures market—something that can be found in equities and commodities here. So, why not currency?

It took almost a year for things to fall in place. But they have finally. Detailed guidelines for setting up a currency futures market have been put in place by RBI and the Securities and Exchange Board of India (Sebi) following the tabling of a recent report by a standing technical committee comprising members of the two bodies.

Already three exchanges — Multi-Commodity Exchange (MCX), National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)— have applied to Sebi to start operations in currency futures. Of the lot, NSE will be the first to go live with trading sessions in currency futures commencing on August 29.

The implications of this for corporate India are many. For one, companies now have an additional tool available to them to hedge their underlying currency exposure. As N S Venkatesh, managing director and chief executive officer, IDBI Gilts, says, “This is a welcome move because it opens up the market. There will be greater participation of players and it will bring about more liquidity.” Says B Prasanna, managing director and chief executive officer, ICICI Securities Primary Dealership Ltd, “I think it is a boon for the small and medium companies. Even high net worth individuals would benefit from it.”

For corporates, especially in the SME segment, that are all reeling under the twin impact of inflation and high interest rates, this is good news indeed. Most companies, big and small, hedge their underlying currency exposure by getting into forward contracts with banks. These are basically over-the-counter (OTC) traded contracts where a company can buy or sell a currency at a future date based on a predetermined or pre-agreed price. It is a large market estimated at about $8-10 billion in India when at its peak from October to March, barring December. The size of the market is about $4-5 billion on an average. But the very nature of the market leaves little room for transparency between players or participants.