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To improve the depth and liquidity in the domestic foreign exchange market, the Reserve Bank of India (RBI), in its bi-monthly monetary policy review, allowed foreign portfolio investors (FPIs) to participate in the domestic exchange-traded currency derivatives market. The arrangement has been made to the extent of their underlying exposures and an additional $10 million.
Besides, the central bank also allowed domestic entities with a similar access to the exchange-traded currency derivatives market. RBI will issue detailed operating guidelines in this regard separately.
“The intent is to bring off-shore (unregulated) non-deliverable forward (NDF) flows into the on-shore exchange-traded fund (ETF) platform en-route to the over-the-counter (OTC) platform on which RBI has absolute control,” said Moses Harding, group chief executive officer (liability and treasury management) and chief economist of Srei Infrastructure Finance. “It is a fair step, allowing offshore investors not only to hedge underlying exposures but also allow view-based trading up to $10 million.”
However, Harding added it was too early to take a view on the extent of the shift from NDF to on-shore ETF/OTC, which was subject to operational convenience and extent of liquidity in the NDF platform from non-Indian investors.
Bankers are now waiting for detailed operating guidelines, as they seek more clarity. “Allowing FIIs to hedge their underlying plus $10 million is one step forward towards deepening and broadening the market,” said Mohan Shenoi, president-group treasury and global markets, Kotak Mahindra Bank. “If domestic entities are also given the same facility then clarification is needed as to how this will coexist with their OTC transactions with banks against the same underlying. Currently, banks cannot participate in currency future on their own account. This restriction needs to be removed for the overall development of the market.”
Last July, RBI had imposed restrictions on banks with regard to trading in currency futures and options. Banks were barred from trading in currency futures and exchange-traded currency options market on their own. They were, however, allowed to trade on behalf of their clients. The move was taken to arrest volatility in the exchange rate.
Market players said the move to allow FPI, coupled with recent lifting of curbs on currency trading, would boost liquidity in the exchange-traded currency derivative — offered by the NSE, BSE and MCX-SX. Currently, only Indian residents are allowed to trade on the currency derivatives segment.
Trading volumes in exchange-traded currency derivatives had witnessed a sharp fall last year, after Sebi and RBI had imposed strict curbs, such as doubling of margin requirements and ceiling on position limits.
The combined monthly turnover at the three exchanges had come off from its peak of Rs 64,039 crore witnessed in June last year to below Rs 15,000 crore. However, after removal of some of the curbs by the regulators, the average volume in the month of May once again climbed above Rs 20,000 crore.
