Currency futures catch up, but still long way to go

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: Ten months after the launch of currency futures, the market is still under growth pangs. From almost nothing, the volume in rupee futures has shot up to 1.4 crore contracts in May on market leader NSE, and 1.2 crore on the MCX as compared to 11.6 lakh and 9.4 lakh contracts respectively, when currency futures was launched around 10 months ago.

The recent spurt in volume of rupee futures is due to the volatility in the rupee. Corporates, small- and medium- sized enterprises, and individuals who require foreign exchange for their travel abroad, have in the last few weeks rushed to take positions in the rupee futures.

However, there are a number of challenges for the currency futures market. The foremost among them is that most large corporates still go to banks to take forward cover against fluctuations in the rupee.

This is because the charges levied by the banks are negotiable, and in many cases the banks even waive the charges for certain parties on a discretionary basis. When it comes to exchange-traded rupee futures, there are standard margins, brokerage etc. The exchanges cannot charge different rates for different investors. This is a major area of concern for the development of the currency derivatives market in India. “The regulators (RBI and Sebi) must find some way to resolve this, or else, companies would rather go to banks which treat them as favourite customers and charge less,” said a source at the NSE. “In a general sense, though, the price at the exchanges is comparable with that at the over-the-counter forex market,” he added.

And there is a paradox here. Banks are themselves the platform for the over-the-counter rupee forward trade. On exchanges, interestingly, they form the largest bloc of investors. On an average, banks constitute 40% of the total investors in exchange-traded rupee futures, corporates account for up to 25% and the remaining share is divided among retail investors and brokerages’ proprietary business. There is a large number of small- and medium-sized companies, and exporters who take positions in rupee futures at the stock exchanges, but figures pertaining to their activity is not enumerated at present.