Two of the policy tweaks in the monetary policy are aimed at the currency market. The move to increase foreign and domestic investor participation in currency futures is an attempt to revive this segment. Increasing the amount Indians can send overseas can help counter the deluge of foreign portfolio inflows in recent times.
The RBI has allowed foreign portfolio investors to participate in the currency derivatives traded on exchanges to the extent of their underlying exposures plus an additional $10 million. Similar concession is also granted to domestic institutions (mutual funds, insurance companies, and so on).
This is a shift from RBI’s prior stance where foreign and domestic institutions could use currency futures only to hedge their exposure and not trade in them. By allowing an extra limit of $10 million, the RBI is giving the institutions the permission to trade; just a little.
This state of affairs is due to the curbs imposed by the RBI on these contracts in the second half of last year.
It had asked banks not to trade in this segment for their own purpose (proprietary trading). Margins were also doubled. This was done to curb speculative activity in currency that was seen to be the reason for the rupee spiralling down towards 70.
Now that the currency is relatively stable, the margins on this contract have been brought back to prior levels. FIIs were also recently given permission to trade in currency futures.
For small traders The rupee has been one of the most volatile currencies in the past year.
The importance of exchange-traded currency futures increases in such periods of high volatility. The contract sizes are very small, thus making them ideal for small importers and exporters who can use them for hedging needs. The higher transparency on exchange-traded contracts is also a point in their favour.
Higher remittance The RBI has also increased the limit of remittances under the Liberalised Remittance Scheme (LRS) to $125,000 from $75,000. Huge volatility in the forex market and FIIs pulling out money last year saw the rupee tumble to its all-time low of 68.85 and forced the RBI to reduce the remittance limit under LRS to $75,000 from $200,000 in August 2013.
The rupee has recovered since and is now stabilising around 60 levels. Also, FII inflows are picking up. The debt market has seen an inflow of $4.5 billion since last September while the equity market has witnessed $16.6 billion inflow over the same period. This is probably the trigger for the RBI’s move to relax overseas remittances.