The exchange-traded currency futures (ETCF) market in India, launched on Friday in Mumbai, has already begun attracting corporate attention. The level of open interest increased by 103% to 27,707 contracts on Tuesday from 13,641 contracts on Friday.
Open interest is the total number of outstanding contracts that are held by market participants at the end of the day. While market makers are driving up volumes, analysts also expect small & medium enterprises to join in over time.
Hitherto, without the currency futures market?one of the key financial sector reforms flagged off by the government?no domestic company could take a long-term view on the rupee?s movement and invest accordingly. The forex derivative losses suffered by large swathes of India Inc this year could be a thing of the past as this market matures.
The National Stock Exchange, which is first to start this product, says the initial response has been in line with expectations. ?Generally, the first day?s trading is high, which then declines before expanding over time,? said a senior NSE executive, asking not to be named.
Trading volumes in ETCFs stood at Rs 291.05 crore on Friday, dipped to Rs 107.74 crore on Monday, but picked up smartly to Rs 186.44 crore on Tuesday. ?Eventually, the ETCF market will grow very large in size. Nifty futures also took a long time to take off,? the executive said.
A currency future allows an investor to buy or sell currency at a future date at a predetermined price. ?This product has lot of potential, but as of now, it is mainly market makers who are buying these contracts,? says Angel Broking derivatives analyst Siddarth Bhamre.
ETCFs could be a useful hedging tool for equity and commodities market participants as well. Though this synergy between the equity, commodities and currency markets is expected to boost volumes, the ban on FII and NRI participation, who bear substantial currency risk, is being seen as a major dampener.
Markets regulator Sebi has indicated that it may allow FIIs and NRIs to enter this market and introduce rupee-euro and rupee-yen contracts. At present, only rupee-dollar contracts are allowed. The $5-million open position limit is also too small to attract any significant interest from large companies, say analysts.
?In the commodities market, we are talking of big players like Reliance and Hindalco, but for them a $5-million open position limit (for ETCFs) is nothing,? said AV Rajwade, an independent forex & treasury management consultant. Apart from price volatility, commodity market participants face currency value risk, which can be hedged using ETCFs. The Multi-Commodity Exchange and Bombay Stock Exchange are also slated to launch currency futures trading.
?Forward market regulations permit participants to hedge their risk up to the amount of their foreign currency exposure. But in currency futures there is no exposure limit, which makes it a lot more attractive for traders and speculators to get in,? said a derivatives expert. Rajwade pointed out that Indian rupee currency futures failed to take off in Dubai, whereas non-deliverable forwards are thriving in Singapore.
