Currency derivatives trading volumes dry up on RBI diktat

Notwithstanding large foreign portfolio investors inflows in equity markets, the trading volumes in the currency derivatives on exchanges have fallen sharply and shifted to offshore centres especially to Singapore after the recent RBI diktat.

The currency futures turnover on NSE was down 83 per cent to ₹2,073 crore in July against ₹12,079 crore logged in April. Similarly, that of options was down 98 per cent in the same period to ₹2,018 crore against ₹1.54 lakh crore on NSE. The volumes on BSE and Metropolitan Stock Exchange of India had also dipped.

Per SEBI annual report, the aggregate turnover of all the exchanges in the currency derivatives segment decreased by 15 per cent to ₹377.4 lakh crore in FY24 against ₹445.9 lakh crore in FY23.

• Also read: FPIs continue aggressive selling post-Budget: Pull out ₹20,919 crore since July 23

Last fiscal, proprietary trading accounted for 66 per cent on NSE and it was high at 90 per cent and 10 per cent on BSE and MSEI, while FPI accounted for 9 per cent, 3 per cent and 6 per cent on the three exchanges, per SEBI report.

In January, the banking regulator has made it mandatory for investors to have valid unhedged underlying contracted exposure to trade in the exchange traded currency derivatives market.

In 2014, FPIs were allowed to trade in exchange-traded currency derivatives with a limit of $100 million, without the requirement to establish an “underlying exposure” in equities, bonds, mutual funds, or other permissible financial instruments.

• Also read: FPIs in a spot over RBI currency derivatives diktat

Offshore shift

However, after the RBI diktat most of the FPIs have shifted their rupee trades to overseas market. The open interest in rupee/dollar futures on the Singapore Exchange has nearly quadrupled from the start of this year to 2.68 lakh contracts worth over $6 billion. The average open interest in 2023 was 92,000 contracts.

Narinder Wadhwa, Managing Director, SKI Capital, said the new RBI regulation led to a decrease in speculative and arbitrage activity, as many traders found the new compliance requirements burdensome.

Some market participants shifted their trading activities to offshore markets such as Dubai and Singapore as they have fewer restrictions, he added.

Jateen Trivedi, VP Research Analyst, LKP Securities, said the RBI removed speculators from the market by allowing positions in currency derivatives only for hedging purposes. The measure was aimed at curbing rapid rupee depreciation caused by speculative positions and market participants reduced their involvement in currency derivatives due to the stricter norms, he added.