Indian exchanges aim to attract overseas rupee trading volumes onshore

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Published: May 9, 2020 4:10 AM

Finance minister Nirmala Sitharaman inaugurated the rupee-dollar derivatives trading on the two exchanges on Friday.

Excessive rupee trading volumes in the overseas market that is outside the purview of the regulator has been a cause of concern during times like the 2013 taper tantrum when the currency had depreciated significantly.Excessive rupee trading volumes in the overseas market that is outside the purview of the regulator has been a cause of concern during times like the 2013 taper tantrum when the currency had depreciated significantly.

With the launch of trading in rupee derivative contracts — that will be settled in foreign currency — on two exchanges in the IFSC Gift City, India is aiming to bring at least part of the overseas rupee trading volumes to its shores that may eventually help the country prevent extreme movements in the currency during times of turmoil. Finance minister Nirmala Sitharaman inaugurated the rupee-dollar derivatives trading on the two exchanges on Friday.

The India INX which is a subsidiary of BSE and the NSE IFSC which is a subsidiary of NSE launched trading in rupee derivative contracts, including futures and options. “Long trading hours and USD settlement at IFSC would also help to improve access for overseas participants. This shall in turn help these participants in hedging their rupee exposures effectively at IFSC,” said a statement issued by NSE IFSC.

So far, foreign players who wanted to take exposure to the Indian rupee or speculate on the currency have been taking positions in the non-deliverable forwards (NDF) markets. NDF markets enable trading of the non-convertible currency, like a rupee, outside the influence of the domestic authorities. For instance, trading in rupee NDF takes place in Singapore, Hong Kong, Dubai, London and New York markets. These contracts are settled in a convertible currency, usually US dollars.

London has emerged as the biggest hub of rupee trading in recent times with volumes exceeding significantly compared to that in India. The average daily turnover of rupee NDF in London increased from $8 billion in October 2016 to $23 billion in October 2018, according to the Bank of England’s semi-annual forex turnover survey.

Excessive rupee trading volumes in the overseas market that is outside the purview of the regulator has been a cause of concern during times like the 2013 taper tantrum when the currency had depreciated significantly.

A report by the task force on offshore rupee markets chaired by former RBI deputy governor Usha Thorat stated that the sharp growth in the offshore trading volumes in the rupee NDF market in recent years even beyond the volumes in the onshore markets have raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability. “It is true that if a good part of these trading volumes shift onshore, it could help mitigate unwanted movements in the currency. However, building volumes may itself take a reasonable amount of time,” said a currency market expert.

V Balasubramaniam, MD and CEO at India INX, said he intends to see a significant rise in rupee derivatives trading volumes during this quarter itself. “I believe we can grow the rupee derivatives trading volumes to close to $1-1.5 billion per day during this quarter itself,” Balasubramaniam said.

Vikram Limaye, MD and CEO, NSE, said that introduction of rupee derivatives in IFSC is crucial for the development of Indian financial markets. “Rupee derivatives in IFSC would help in creating vibrant forex market in India. This will also play an important role to bring offshore rupee market back to India and strengthen price discovery in Indian markets,” Limaye stated.

Meanwhile, the rupee on Friday closed 18 paise up at 75.54 against the dollar, hitting over one-week highs.

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