The nascent currency futures market may drive Indian corporates away from participation if foreign institutional investors (FIIs) are allowed to hedge on the domestic platforms, feared Chiragra Chakrabarty, Principal Consultant, PwC.
The entry of FIIs into currency futures would lead to very high volatility as has been witnessed in the equity market. Therefore, domestic corporates may stay away from participation.
“Currency futures market should be given atleast two years for maturing and only after that FIIs should be allowed,” Chakrabarty said.
In view of the FIIs playing a major role in the market development, corporates are apprehensive about the FIIs’ entry in the trading of currency futures which is currently offered by MCX-SX, NSE and BSE.
Overcoming the initial reservations of critics, volumes in currency futures are showing gradual growth. While the stock index futures took four years to cross the benchmark Rs 1000-crore average daily turnover mark, the trading in currency futures accomplished it in less than two months much to the surprise of even the market proponents. Average daily turnover in MCX-SX and NSE together are showing continuous rise reaching to a level of Rs 2000-crore (single side) since the trading in currency futures began about four months ago.
In view of the promising performance of this segment, analysts normally expect that the participation of FIIs in currency futures trading will lead to further rise in volumes and improvement in market depth.
Back at the capital markets, most of the analysts attribute the fall of the sensex from 21,000 to 9,000 levels to the plight of the FII investments and the failure of the market to develop equally effective domestic players or innovative products which can challenge the downward momentum to have the downfall stopped at a reasonable level.
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Allowing FIIs in currency futures will take the country closer to free convertibility of the currency. That being the country’s genuine aspiration, the issue is about the timing. In the back of so much of uncertainty on global economic prospects and the pressure building on the emerging economies, it will not be the right time to move in this direction at this juncture particularly when the currencies of several emerging markets in themselves are experiencing intense volatility.
Lessons from domestic stock markets indicate that FII participation has the potential to make this segment more speculative and volatile. Rupee being the currency of a major economy such as India, contrarian views on its current strength and position could lead to wide swings in currency rates affecting trade balance, an analyst said.