More currency futures contracts to widen hedging

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Mumbai: The Reserve Bank of India (RBI) has proposed to permit stock exchanges to offer trading in currency futures contracts of the rupee with euro, yen and pound sterling to allow importers, exporters, corporate houses and banks to hedge their risk against a wide range of currencies. The RBI will be making necessary amendments to Currency Futures (Reserve Bank) Directions, 2008, in this regard.

The proposal, if implemented, will make it simpler and easier for players in the export-import business, having underlying exposure to other currencies to hedge their currency risk directly under an exchange trading platform instead of hedging in the Over the Counter (OTC) market through a designated bank. “The move will result in ease of cover operation for exporters and importers as they can now hedge their forex risk against wide range of currency directly under the exchange trading platform,” said J Moses Harding, head (global market group), IndusInd Bank.

At present, futures trading is allowed only in currency pairs of US dollar-INR currency under the organised exchange trading platform. Currently 70% of India’s external trade is denominated in dollar terms. “By allowing futures trading in other pairs of currency, RBI has enabled 95% of risk associated with currency fluctuation on India’s foreign trade to be covered under the exchange trading mechanism,” added Harding.

The measure will also give wider choices to speculators and punters to take a call on currency movement. A chief forex dealer with a leading private bank in India said, “Those speculators who are having a view on the movement of currency like euro, yen and pound sterling will now get an opportunity to take position in the currency futures market.” Despite persistent demand from market participants, capital markets regulator Securities & Exchange Board of India (Sebi) was going slow on the proposal in view of the recent financial market crisis.

Market players have also demanded introduction of more variants like mini- and maxi- contracts in the existing US dollar-INR futures contract to attract both small and large players into the exchange trading platform that would help boost volume in the exchanges.

While welcoming the proposal, Joseph Massey, MD & CEO, MCX’SX said, “We are hopeful that this development will soon be complemented with extension of exchange trading timings for currency futures beyond 5 pm to cover US and Europe market timings.”