Column Futures coming soon, to NSE

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: Nifty. If macroeconomic policy in India improves, the trading by RBI on the currency market will subside and rupee-dollar volatility will go up. This would increase demand for currency risk management.

There are five mistakes in the launch. First, derivatives trading on currencies other than the dollar is prohibited. At a time when China is pushing for futures trading of the yuan outside China, which would have been an ideal opportunity for us to have traded rupee-yuan and dollar-yuan contracts, we have gone in the wrong direction. Second, options trading is banned. Third, FII participation is banned. Fourth, NRI participation is banned. Fifth, positions larger than $5 million are banned—a tiny limit when compared with the size of exposure that is found in a trillion dollar economy.

None of these bans are grounded in economic logic. After all, RBI oversees a non-transparent market—the ‘currency forward market’—where each of these bans is absent. If these features are permitted in a non-transparent club market, they surely belong in a superior market design.

At the early stages of a market, policy makers should be trying to create a supportive environment to increase the probability of success of new products and markets. In India, instead, policy makers have worked to reduce the probability of success of the market. The first task of the next RBI governor should be to overturn these five bans.

Despite these efforts at preventing progress, the currency futures market is quite likely to take off. The positive factor in favour of this market is India’s massive GDP and burgeoning internationalisation. Trade and capital flows are growing at very high rates; so a large number of individuals and firms are exposed to currency risk. Electronic trading on exchange screens has a way of capturing attention; even dealers on the OTC market will soon be riveted by the flickering quotes on the NSE screen.

I am reminded of the early launch of NSE. D Balasundaram, who lives in Coimbatore, once told me that in the bad old days, people outside Bombay saw the drama of the stock market in the newspapers every day, but couldn’t participate in it. Then NSE came along, and all these onlookers became participants. In similar fashion, for all these years, most of India has seen the drama of exchange rate fluctuations, but has been blocked from trading it. For the first time now, these onlookers can become participants. It is quite liberating.