RBI to regulate foreign exchange futures

The Reserve Bank of India will be the regulatory authority for currency futures trading, the draft guidelines for which will be issued soon by the central bank.

In a meeting between the central bank and market participants last week, it was also decided that futures would be introduced both as an exchange-traded product and over the counter (OTC).

The RBI will also be reviving interest rate futures that were introduced in 2003, but failed to take off due to the lack of a well-developed pricing curve in the market across maturiites.

The regulator wants market players in India to have additional trading instruments to minimise the impact of the non-deliverable forward (NDF) market, over which the regulator has no control. NDF is a derivative market based on the rupee-dollar exchange rate operating in south-east Asian markets .

Earlier, the central bank was not in favour of currency futures trading on stock or commodity exchanges as they are regulated by the Securities and Exchange Board of India (Sebi) and the Forward Markets Commission (FMC), respectively.

This could dilute the RBI's regulatory power on the domestic foreign exchange market which, in turn, could have implications on the exchange rate management, the RBI's sole prerogative.

An RBI panel also favoured that unlike the OTC currency market in India, it could relax the requirement of the underlying for futures trading to enhance liquidity.

The central bank is of the view that banks, brokers and other fixed-income traders and retail participants could be allowed to participate in futures trading. It has, however, expressed reservations in allowing foreign institutional investors since they do not hedge a major part of their portfolio.

The currency futures position will be settled in rupees and there may be limits prescribed for individuals, banks and traders for taking positions in the futures market to check the impact of futures trading on the exchange rate.

However, there is an ambiguity whether the central bank will participate in futures trading unlike its active intervention in the inter-bank spot and forward markets to control the rupee-dollar exchange rate. This, it feels may reduce the manipulation of the exchange rate since it is the sole authority for managing it.