Trading volumes in the currency futures segment of both the MCX SX and the National Stock Exchange (NSE) have risen by nearly 44 per cent in October so far, compared to last month. The rise, say experts, can be linked to a strengthening rupee, which went up 3 per cent against the greenback during this period.
On NSE, over 1.68 million contracts have been traded in October so far, compared to around 1.17 million contracts in September. On the MCX SX, over 1.72 million contracts have been traded so far this month, compared to a little over 1.19 million contracts in September. The rupee, which has gained over 10 per cent from its March 2009 low of 52.17, was last traded at 46.74 against the dollar.
Although the size of trades has not been quite significant compared to volumes in developed countries, it is mainly punters who have been placing their bets in the segment due to signs of economic recovery.
The rupee has been constantly rising against the dollar since March 2009 on the back of heavy flow of investments into the country. Foreign institutional investors (FIIs) have invested over $15.64 billion in the domestic equity market so far in 2009, beating the inflows of $14.4 billion in stocks registered in 2007.
The domestic currency futures market, however, is still in a nascent stage as it was started only last year. Major trades in the currency futures are done in the unregulated non-deliverable forwards (NDF) market run by a few top banks from Singapore. In India, no foreign fund or institution can take position in the segment.
“The recent rise in trading volumes has been mainly due to high fluctuations in the currency. However, we have conducted over 200 training programmes to educate people about the importance of currency futures, which could be one of the major contributors to the rise in volumes,” said MCX SX Executive Director U Venkatraman.
This vibrant NDF market, which dates back to the 1990s, was a response from foreign banks and brokers to restrictions on onshore currency forward contracts clamped by many governments. Hedge funds contribute to nearly 80 per cent of the volumes in Singapore, the biggest NDF market for trading in currency of all major Asian countries. All the deals here are in dollars and settled in cash by paying the difference between the contracted forward price and the resulting spot price of the rupee on the settlement date. The NDF market serves hedge funds, multinationals taking the participatory note route to buy stocks and entities interested in speculating on India but cannot take rupee exposure legitimately.
In order to hedge their risk when large funds take positions in the Indian stock market, they may go short on the NDF market and buy there when they sell stocks to convert their money to dollars. Thus, no rupee transaction actually takes place, but the instrument serves as a betting device on the value of the rupee. The market has witnessed a huge growth, with the average daily transactions exceeding $700 million in 2007-2008 from about $100 million in 2003-2004.
Of late, some local trade bodies have made representations to the Securities and Exchange Board of India and the Reserve Bank of India to introduce cross-currency futures and other currency pairs such as rupee and yen.
Source: Business Standard