Jamal Mecklai: Rupee futures - It's their time to disco

MARKET MANIAC

We've just shifted house and, amongst the many wonderful elements of my new life, I now have at-will access to music. I used to listen to music all the time""from Jimi Hendrix to Wagner to, more recently, Kajra Re""but, somehow, over the past several years, it became much too complicated to dig out a CD, slip it on the player, and so on. Maybe it's laziness, maybe it's age, maybe it's a belief that technology should be able take care of it for me""I mean, it is the 21st century, right?

In fact, one evening I had been talking to my son and a couple of his friends and I told them that I wanted a system that would simply play the music I wanted when I wanted it with zero intervention on my part. They laughed and said, "i-pod".

I said, "No, even that requires too much intervention; technology should anticipate my needs."

They said, "Yeah, right!"

So, for now, I settled for a wi-fi solution that has all my CDs running off my computer. It ain't perfect""I still have to turn on the computer and push a button""but it's pretty good. Now, all I have to do is learn how to buy tunes from i-tunes and I'm set.

Anyway, the other day, in my hands-and-jhanjat-free life, I suddenly heard IT'S THE TIME TO DISCO. It was fabulous. I hadn't heard it in a long, long time and had forgotten how much I loved it""I used to drive everybody around me crazy whenever it came on. And, of course, I still do. And, while I was shaking my head wildly, I realised that (1) a classic is something (or someone) that always sounds (looks, feels, is) great, and (2) it's remarkable how even classics slip from our minds so easily. Something to do with life, I suppose, or, in context, hard disk space in the brain.

And, while I was thinking this, I realised that there must be classics in other areas""say, business planning, market development, cricket, whatever""which, for some reason""right place but the wrong time, for instance""we forget about till ...

And, wouldn't you know, I was talking last week with the MD of one of the dynamic new commodity exchanges and he asked me whether there was any way that his customers who were arbitraging gold between the domestic market (his exchange) and the global market (using, I assume, their $25,000 entitlement as margin) could hedge their USD/INR risk. I ran through the regulations in my mind and said, "No, unless, of course, they have an underlying forex exposure."

He continued, "But can't you start a market where you buy their risk""there'd be plenty of volumes on both sides and there would be no actual delivery of dollars, so there shouldn't be any problem from the RBI."

"Makes perfect sense," I said, "a great business opportunity. Except that ..."

And then the penny dropped.

Of course. Indian rupee futures. We had been talking about them as long ago as the Sodhani Committee""that was 1994. And, now, it must be time.

Quite simply, USD/INR futures would be rupee-settled contracts, which would gain or lose value depending on how the rupee moved against the dollar in the inter-bank market. Just like futures on Infosys or Reliance or, for that matter, gold. They would have to be traded on one (or more) of the exchanges and would enable anyone who had a view on the rupee to simply put down a margin and place her bet. Just like today anyone can put down a margin and buy (or sell) Reliance or soybeans or guar seed.

This would enable my friend's gold arbitragers to hedge their risk, which would certainly lead to increased""and, perhaps significantly increased""volumes on the commodity exchanges, which would be a major plus, particularly as the finance ministry is once again looking at making Mumbai a regional financial centre.

Equally importantly, it would start to level the playing field between banks and primary dealers and other non-authorised dealers in foreign exchange, which could have the spin-off effect of making the MIFOR curve more in sync with the gilts yield curve, since, as a result of currency futures, non-ADs would, just like banks, be able to trade both forex and money. This in turn would lead to greater liquidity in the domestic money market""(which should be) number one on the regulators' wish list.

Again, it would enable companies with actual USD/INR risk but no exposure""say, a company selling steel or aluminium in the domestic market, or a company buying fuel oil domestically""to hedge at least their currency risk in the futures market, improving risk management efficiency all around.

It has been clear for some time that the domestic forex market has been crying out for change. The way the rupee jerks about every time there's a mere $200 million inflow into the market makes it extremely difficult for companies to manage risk. We urgently need more liquidity""in terms of daily volume""in the market. Even at $12 bn a day, it represents a mere 15 times multiplier on trade. Fully developed market volumes have a multiplier of over 100. While we are far from being fully developed, the reality is that Indian business is certainly more than 15 per cent of the way to being globalised. And the thin market they are forced to live in imposes a serious handicap""note, for instance, the quarterly discomfiture of no less than Infosys, whose best efforts at managing risk appear to be of no avail.

I have little doubt that the RBI is seized of this need. Perhaps, their concern is that the next logical step forward appears to be a giant one""full convertibility, for which neither they nor the market may be fully ready.

Rupee futures, however, would be a perfect half-way house.