Activity in the exchange-traded currency derivative market is once again gathering pace.

Daily average volumes in the currency platform of the National Stock Exchange reached a record high in April while the new entrant – USE – also saw a spike in turnover this month.

While some of this volume-spike can be attributed to the recently introduced currency options, experts say that growing awareness about these products, higher volatility in forex markets and smaller companies using these instruments to hedge foreign exchange exposure could also be leading to the higher volumes.

Soaring turnover

Average daily turnover in currency derivatives that was hovering around Rs 13,000 crore in January on the NSE rose to Rs 23,000 crore by April, a jump of almost 68 per cent.

Average trading volume on the United Stock Exchange has also registered a strong growth from Rs 2,000 crore to over Rs 6,000 crore in this period.

The other player in this segment, MCX-SX, has, however, not seen a similar jump. It has more or less maintained its average daily volumes between Rs 17,000 and 18,000 crore since the beginning of this year. It may be recalled that MCX-SX was denied permission to trade in the USD-INR currency options, which the other two players were allowed to do from last October.

Currency options

Part of the volume growth on NSE and USE could be due to investor interest in trading options.

Volumes in currency options traded on NSE jumped from a daily average of Rs 1,000 crore in January to about Rs 6,000 crore by April. USE has also recorded a strong growth in options volumes over the last two months.

According to Mr Saurav Arora, President, Marketing and Business Development, United Stock Exchange, there is an increased interest from smaller companies and hedgers towards currency options since these instruments are more transparent with a better price discovery mechanism.

RBI guidelines

Recent RBI guidelines restricting companies with net-worth less than Rs 200 crore and export and import turnover of less that Rs 1,000 crore from using the alternate OTC market for cost-reduction structures could also have prompted some companies to turn to the exchanges for currency hedging.

“While it is difficult to pinpoint the exact cause (for increase in volumes), we are seeing increased interest from several firms towards currency futures probably as a result of the RBI guidelines,” says Mr Girish Iyer, Head of Forex Research, Advisory and Trading, Mecklai Financial.

“However, since the contracts are cash settled and SMEs still have to rely on the banks for the underlying, there is still a hurdle in on-boarding,” he added.

Spike in volatility

Trading opportunities have also abounded, thanks to increased volatility in foreign exchange markets, with the dollar weakening against a basket of currencies and Euro rallying due to interest rate hike by ECB. Rupee too has been giving anxious moments to traders and hedgers with the dollar-rupee rate threatening to move below the 44-mark.

“Volatility in foreign exchange markets has increased this month and that could have attracted higher trading interest,” said Mr Arora.

Mobilisation in awareness

Growth in volumes could also be due to, “continued mobilisation in awareness by exchanges and intermediaries such as us,” added Mr Iyer. “More importantly, players are also getting a sense of how they could develop this as an alternate asset class.”

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