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.
With the NSE alone having two lakh trading terminals across the country, the currency futures cult is really spreading. Experts, however, point towards the need to improve the depth of the currency futures market. Analysts and experts say there is a need for introducing more products in the currency futures segment. At present, there is only the dollar-rupee pair available for trading. The size of a standard contract is $1,000. Experts are of the view that more currency pairs involving major currencies of the world such as the euro, yen, and Swiss franc are the need of the hour. They say that most of the currency arbitrage takes place, apart from the dollar, in these currencies too. ?Sebi is going slow on allowing other currency pairs. Unless more pairs are introduced, the market won?t gain depth,? said a stock broker.
Another problem dogging the currency futures market is that only the near-month contract is active. The far-month contracts are not very active, with very low volumes of trade, on the exchanges. Investors with a genuine need for hedging will look only at the far-month contracts, since their forex receivables have a long cycle. Experts say that the exchanges and regulators must act upon increasing the depth with regard to far-month contracts too. At present, stock exchanges offer contracts expiring in the successive 12 months.
Others point out that even after 10 months of the launch of rupee futures, Sebi is not considering allowing foreign institutional investors (FIIs) in the segment. ?Sebi initially disallowed FIIs in order to curtail speculative trade. But the bulk of the rupee futures trade remains to speculative even now,? said another dealer. He said that around 95% of the trade in rupee futures belong to the speculative trade. Experts believe that Sebi must find newer ways to promote genuine hedging and at the same time allow FIIs.
Brokerages and experts lament the poor level of awareness and education among investors, and even dealers, about currency futures. Most investors who need to hedge against currency fluctuation go to the over-the-counter market at the banks because it is simpler. There is also room for personal negotiation with the bankers about charges, rates etc. None of these comforts are available when one moves to the stock exchange to buy rupee futures. Moreover, the complex structure of the contracts, and other specifications deter many people from exchanges. ?There is a greater need for investor education in rupee futures. People throng to the forwards market because most of them do not know the benefits of the futures trade,? said Navin Mathur, associate director, commodities & currencies, Angel Broking. NSE has organised a number of seminars and educational programmes about currency futures in various parts of the country in the last few months. ?Our officials have travelled across the country to create awareness about the advantages of rupee futures,? said an NSE official who did not want to be named.
Even 10 months after its launch, the currency derivatives market in India is in a fledgling state. A number of issues, such as described above, need to be addressed if the market is to grow. The ball is in the court of the regulator and the exchange for bringing in change.