Central bank keeps Re futures waiting

Trading in rupee futures in India appears far off as the Reserve Bank of India (RBI) considers it as the last leg of the financial sector and capital account reforms. "The RBI is understood to be of the view that this may be the last leg of the reforms, as the launch of currency (rupee) futures in the Indian market will entail full capital convertibility," banking sources said. Currency futures are transferable, exchange-traded contracts whereby currencies are bought or sold at specified future dates.

The capital account is currently not completely open as far as external commercial borrowings (ECBs) are concerned. There is an upper limit of $22 billion. Automatic approval for ECBs is also up to $500 million, beyond which approvals are granted on a case by case basis. Also, there is a limit for foreign entities wanting to invest in the government debt market and sector-specific ceilings on FII, FDI investments in equity. "The introduction of currency futures requires further opening up of the capital account," banking sources said.

Once currency futures are allowed, they will be traded on exchanges and the control on remittance of funds will no longer exist. This is because, any individual who is booking futures does not require an underlying foreign currency exposure, while entities entering into forward contracts, a hedging instrument, need to have an underlying foreign currency exposure.

Moreover, the RBI is already in the process of liberalising the forwards market, which globally is much more liquid and a popular instrument because of its non-standardised nature. The advantage of a clearing house taking care of the counterparty risk in futures can also be had in the forwards market now through the collateralised service agreements, which are accepted globally.

Even though the RBI has liberalised cancellation and rebooking of forward agreements, market players, including foreign institutional investors, have not utilised much of the limits, sources said. The RBI is expected to wait till it gets an experience in interest rate futures, which are at present stuck due to lack of a pricing mechanism.

Bankers are also of the view that futures will not be of much use, as over the counter products like forwards cater to much of the use, being tailor-made in nature. Moreover, futures will enhance the costs of transactions as brokerage fees would be an additional expenditure.

Bankers feel that even if the Dubai Gold and Commodities Exchange launches rupee futures, there would not be much demand as much of the hedging requirements are being met by the forwards market. For purely speculation purposes, the non-deliverable forwards (NDF) market is a much vibrant option. Another section of the market, led by foreign banks, feel that since the RBI has allowed free remittance of $ 50,000, individuals may try out the Dubai futures market at a margin for speculative gains as well as hedging, thus affecting the business in the Indian foreign exchange market.