With huge FII inflows pushing the Sensex to new highs, the domestic currency forward market is witnessing hectic activities in the current fiscal as India Inc seeks to cover its forex exposure.
The average daily trading volume in the currency forward market has shot up to $4 billion till August, 2010, as against the $2.50 billion recorded during the entire year 2009-10. The trading volume in the forward market during April-August 2010 has already touched $424 billion against a total of $622 billion recorded in 2009-10.
Says Ananth Narayan, MD and head (rates & forex), Standard Chartered Bank, ?Due to higher capital inflows and export-import volumes, corporates are more inclined to use forex forward as a hedging tool. Going forward, they expect a strong forex movement, and accordingly, they want to keep their position properly hedged. Trading volume will increase further.?
The outstanding gross position (both buy and sell) in currency forwards, according to data released by Clearing Corporation (CCIL), has recorded around 78% jump to $800 from $450 billion in the last six months, reflecting the increasing confidence and risk appetite of the market participants.
Analysts say counter-party credit risk, a major concern during the crisis, has now minimised. The counter-party credit risk is defined as the risk to each party of a forward contract that the buyer or seller would not live up to its contractual obligations. The risk exists for both parties. According to Indrani Rao, chief forex officer, CCIL, ?The increased volume is evident of a market revival and risk appetite. The counter-party credit risk is also mitigated. Dealers are no more shy of taking longer positions.?
In case of forex derivatives, including currency forwards, exposure to the counter party is much longer. India Inc was shy of taking longer term exposure during the crisis, especially in 2009. ?That was when there was a compression in trading volume in the forex forward market,? Rao says.
Foreign banks, which account for nearly 60% of trading in the forward market, are seeking larger exposure in such deals. Both nationalsed and private banks have a share of about 20% each. However, Narayan observes that nationalised and private sector bank will also increase their share of trading.