Six weeks after banks? trading in exchange-traded dollar/ rupee futures was curbed on fears that speculative positions were being taken, the daily turnover in the market is steadily rising.
The average daily turnover in currency futures on the National Stock Exchange so far this month has nearly doubled to around $2 billion (R11,000 crore) after they had plunged to $1 billion (R7,000 crore) in July just after the measures were announced on July 8 from over $3.5 billion (R23,000 crore) in June and May.
However, according to market participants, the latest rise in volumes should not worry the Reserve Bank of India as the linkage between the futures and the spot market has been snapped due to lack of participation from the banks. Therefore, the rise in turnover on the futures market should not be seen as a sign of large speculative activity.
?Banks are not there in currency futures. Because of so much movement in the spot, there is a lot of day trading in the futures, basically from equity or commodity traders,? said an official at one of the exchanges that offers currency futures.
Banks were banned from taking proprietory trading positions in currency futures on July 8 in a bid to clamp down on speculative trades involving the futures, the dollar/rupee spot as well as forwards market. ?Both the spot and the futures market are behaving independently and there is hardly any linkage,? said Ashutosh Raina, chief forex dealer at HDFC Bank.
Futures market had come under the radar of regulators after the rupee’s rapid fall to all-time low in June and July was said to have been partly fuelled due to speculative trades. A jump in the turnover of dollar/rupee futures market had worried RBI.
RBI deputy governor HR Khan had warned that more measures could be taken by end of August if volumes do not come under control. ?The reason why regulators came down on is they wanted to see how much of speculative elements were in play,? said Madan Sabnavis, chief economist at CARE Ratings.
Sabnavis added the premium that the dollar commands over the rupee in the over-the-counter forwards market and the exchange traded futures are not similar, indicating that both the markets are no longer linked.
?If you see forwards and futures premium, they are not in sync. So it shows that there will be a disconnected between futures and forwards,? he said.
Indeed, the movement of the dollar/rupee futures was far different from the spot rate. On August 22, when the rupee hit a fresh historic low of 65.56/$, the three-month dollar/rupee futures was quoting around 65.92/$, a modest premium of 44 paise. However, its onshore forwards conterpart was trading at a hefty premium of over 70 paise. On Monday, the rupee weakened to end at 64.31/$ while the three-month dollar/rupee futures contract was last settled at 64.46/$. The three-month forward settled at 65.99/$.