Spurred by the RBI, currency trading regains its mojo

Trading in rupee futures and options on stock exchanges surged in 2015 thanks mainly to the efforts made by the Reserve Bank of India to resuscitate this segment.

While the NSE recorded a 49 per cent increase in the value of currency futures and options traded in 2015, the BSE logged a 111 per cent jump. The third exchange that trades currency derivatives, MCX-SX, too clocked decent volumes.

Volumes in this segment had dwindled since 2013, when the RBI had placed numerous restrictions on currency trading in a bid to curb speculation and prevent the rupee from spiralling lower. The futures and options traded on stock exchanges are, however, more transparent compared to the currency forwards traded in the inter-bank forex market and hence more suitable for smaller companies.

Therefore, in recent times, the RBI has been making various changes to the rules governing these instruments in a bid to increase participation and liquidity.

Last March, the RBI increased the limit up to which foreign and domestic investors could buy these futures and options (without having any currency exposure) from $10 million to $15 million. Three new cross-currency pairs — euro-dollar, pound-dollar and dollar-yen — were also allowed to be traded on exchanges in September, to further kindle interest in this segment.

“The RBI has also started participating in exchange traded derivatives to make its intervention more effective. Banks are also now more active on exchanges, especially to exploit the exchange-OTC arbitrage on currency derivatives prices. All these have led to greater volumes,” says Anindya Banerjee, Associate Vice-President, Currency Derivatives, Kotak Securities

High volatility in currency markets with the yuan devaluation and the anticipation of the Fed interest rate hike could also have resulted in higher interest in this segment last year.

Equity derivatives, however, continued to hold the pole position in trading volumes on exchanges. There was a 30 per cent jump in the value of equity futures and options traded on the NSE in 2015 over the previous year.

But trading in the commodity exchanges, the MCX and NCDEX, has been hard hit over the last few years due to the imposition of the commodity transaction tax, crash in prices of commodities and the NSEL scam. Value traded on the NCDEX was flat with 1 per cent growth in 2015, while the MCX recorded 4.5 per cent increase in turnover value.

But both volume and value traded in NSE Bond futures, the new kid on the block, doubled in 2015. “There are some high networth individuals who are asking us to deploy money into these instruments,” says Bhavin Desai, Head of Derivative Research, Motilal Oswal Securities.

So, which trading segment is likely to see more action in 2016? “With the launch of the three new cross-currency contracts, and futures and options available on all listed pairs, we expect a substantial jump in currency derivatives volumes in 2016,” says Kotak Securities Anindya Banerjee.

“The trading time for these contracts (currency futures and options) can extend from 9 am to 5 pm, well into the US session. This can also help volumes as some participants can then shift from offshore to onshore rupee derivatives market,” he adds.

Despite equity derivatives recording 12 times more daily turnover than currency derivatives, many experts believe that growth in volumes may be higher in currency compared to equity/commodity trading in 2016.