Trading in currency futures will be launched shortly, but market experts said it may get a subdued response as foreign institutional investors (FIIs) have not been permitted to participate.
The unregulated non-deliverable forwards (NDF) market in Singapore will continue to dominate rupee futures trading and retail investors would take the cue from this market before taking any positions on the domestic bourse, experts said.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) recently announced the guidelines for exchange traded rupee futures but barred FIIs and non-resident Indians (NRIs) from participating in it. A leading forex expert said the NDF market would flourish until FIIs are allowed to take position in the domestic currency market.
This way the regulators can also ensure that speculation in rupee comes down as they may have greater control over trades conducted in their jurisdiction. Hedge funds contribute to nearly 80 per cent of the volumes in Singapore, the biggest NDF market for trading in currency of all major Asian countries.
This vibrant market dates back to the 1990s and was a response from foreign banks and brokers to restrictions related to onshore currency forward contracts by many governments.
All the deals here are in dollars and settled in cash by paying the difference between the contracted forward price and the resulting spot price of the rupee on the settlement date. The NDF market serves hedge funds, multinationals taking the participatory note route to buy stocks and entities interested in speculating on India but which cannot take rupee exposure legitimately.
In order to hedge their risk when large funds take positions in the Indian stock market, they may go short on the NDF market and buy there when they sell stocks to convert their money in dollars.
Thus, no rupee transaction actually takes place, but the instrument serves as a betting device on the value of the rupee. While some exporters and importers use this market to hedge their currency risks, large corporate houses often create huge speculative positions to profit from the arbitrage. The market has witnessed a huge growth, with the average daily transactions exceeding $700 million in 2007 from about $100 million in 2004.
The expert said currently, the domestic rupee futures market would mainly constitute retail traders who are out to make a quick buck on the currency fluctuation. The trade is not likely to shift from Singapore.
In fact, even the trading in rupee futures launched in Dubai has failed to make any significant impact due to technical issues and the volumes is generated by punters.
