Possibility of RBI intervention may not make it an attractive ‘asset class’

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: Rahul Jain of The Financial Express spoke to S Ramesh Kumar, senior vice president, Asit C Mehta Investment Intermediates Ltd on the structure and investment- worthiness of currency derivatives. Excerpts:

Can you give us your perspective on the structure of the currency forwards market in India?

The Indian foreign exchange market is an essentially over the counter (OTC) market, trading in the following:

a) Traditional instruments, namely, spot trades, outright forwards and Fx (foreign exchange) swaps

b) Derivative instruments in the form of currency swaps and currency options.

The Reserve Bank of India adopts a managed floating system to keep the currency market stable. A spot transaction is a straightforward exchange of one currency for another and is also the benchmark rate. For example the dollar-rupee rate quoted at say 43.50, is a spot rate of the dollar in terms of the rupee. Settlement date or value date is the second business day after the deal date or trade date

An outright forward transaction (OFT) is a straightforward purchase/sale of one currency for another, settled on pre-agreed date that is three or more business days after the deal date. There is a specific exchange rate for each forward maturity of a currency, different from the spot rate. For example, one month forward rate for the dollar to rupee may be quoted as 43.55. Similarly, there will be a specific exchange rate for a two-month forward, three-month forward, etc. OFT is used for covering a known future expenditure, hedging, speculation or any number of commercial, investment or financial purposes. OFT can be customised for any amount or maturity and there are standard contract periods - one to twelve months.

The OFT exchange rate are quoted as differentials that is at a premium or discount from the spot rate. For example, if the base currency earns a lower interest rate than the term currency, then the base currency will trade at a forward premium or above the spot rate. The Indian foreign exchange market comprises of authorised dealers (89) that include foreign banks, public sector banks, private sector banks, co-operative banks and financial institutions. All firms and individuals can access the foreign exchange market only through authorised dealers for spot and outright forward transaction.