Banks are pushing dollar/rupee options as a cheaper and flexible hedging instrument to corporates amid high forward premiums and a general reluctance to hedge due to a stable rupee.
“Because interest rate differentials are high, companies borrowing through ECBs are buying protection through options because forward rates are high,” said Ananth Narayan G, managing director global markets, South Asia, Standard Chartered Bank.
Forward premiums have stayed at elevated levels over the past eight months with the three-month implied rate staying around 8%, making it expensive for companies to hedge. According to bankers, the cost of hedging through options is slightly cheaper. “It is not a like-to-like comparison but if there is a sense among users that the implied rate is unrealistic, for them options is more appealing,” said Hitendra Dave, head of global markets at HSBC.
Despite the push for options, the turnover in the exchange-traded market has dropped. On the National Stock Exchange, the dollar/rupee options turnover fell to 61,940 crore in October from 75,865 crore in September. In November so far, the derivative has notched a turnover of only Rs 15,595 crore and currency market participants expect the turnover to remain subdued in the rest of the month as well.
In the over-the-counter market too, volumes are low, bankers said. “The market has still not grown in terms of a liquid interbank market and we are not seeing transparent trades in the market,” said Narayan. Dave of HSBC pointed out that most corporates tend to be conservative and there are but only a dozen players in the options market.
Another reason for the fall in options market turnover is the RBI’s more aggressive intervention in the foreign exchange market. Data from the RBI showed that the central bank bought $1.4 billion from the spot market in September. Cumulatively, the RBI has bought $16.6 billion in April-September period.
This intervention has kept the rupee in a tight band of 60.50-61.65/$ over the last five months compared to a wide swing between 68.50 and 62.50 during February-June.