Banks to offer forward contracts to Indian forex players

The appreciation in global currencies, like the euro, pound sterling and the Australian dollar against the rupee by well over 10 per cent over the last four months, is catching the interest of the resident Indians investing in foreign denominated deposits.

Bankers said that rather than the high interest rates being offered on foreign currency denominated deposits, it is the high volatility and fast appreciation of hard currencies against the rupee that is attracting resident Indians.

Resident Indian players of the forex markets will shortly be able to hedge their exchange risk exposure should they feel wary that the current trend of hard currencies appreciating against the rupee (with the exception of the greenback) will not continue.

The Reserve Bank of India (RBI) had in last December allowed Indian residents to hedge their exchange exposure in direct investments overseas through forward or option contracts with authorised dealers.

ICICI Bank will be the first to offer forward contracts. Other banks including Citibank and Bank of Baroda, which have introduced forex deposits, do not currently offer any hedging mechanism.

ICICI Bank officials said that following the demand from some customers, the bank will shortly offer forward contracts as an additional feature.

Introduction of option contracts will, however, take some more time. A resident Indian can now hedge his exchange exposure by buying a forward contract when he opens a forex deposit with a bank.

This would allow him to fix the exchange conversion rate on maturity when he opens the deposit. Playing in the global exchange market would mean that the depositor would have to be savvy on taking a view as to where the currency is headed. Else, he would need to leave it to market forces should he choose not to book any forward cover.

"The way the euro, pound sterling and the Australian dollar have been appreciating against the rupee, it does not make any sense for an investor to book forward today, as it could arrest his chances of gaining the maximum appreciation in the currency," a banker said.

For instance, taking the current value of the euro at 58.072, based on the 11 per cent appreciation that has been seen in this currency since November last year, a depositor could book the exchange conversion rate on maturity today.

Should he decide to book the forward contract at 59 for his deposit maturing two months hence, and the conversion rate at the time of maturity is 58.5, he tends to gain.

This is because the bank would have to pay him the promised conversion at 59. This ensures he does not lose his capital in terms of conversion in the unfortunate eventuality of forex rate works against him.

However, if the conversion rate shoots up to 60 for the euro, then he loses out as the bank would still convert the deposit back into rupees at 59.

Should banks later offer option contracts to depositors, this would allow them to exercise their right if they wish to, with no compulsion depending whether the situation warrants.