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Foreign Exchange

FX news: A future for Indian FX futures

"The government [should] encourage greater trade in exchange-traded in comparison to OTC derivatives.”

There might finally be some liberalisation of the Indian FX futures market, if industry site FOI is to be believed. Currently foreigners are banned from participating, however, a report published last week by the Indian Department of Economic Affairs and Ministry of Finance’s working group on foreign investment concluded that this was “hard to justify”.

The regulation certainly runs counter to the general global push to move financial products on to exchanges, as the report says: “The present arrangement, where foreign investors support the non-transparent currency forward market and are blocked from using the transparent currency futures market, is an anomaly. The government [should] encourage greater trade in exchange-traded in comparison to OTC derivatives.”

But even if the Reserve Bank of India pays attention to the report, it is possible that the use of the market by foreign financial institutions will be curtailed by restrictive position limits. A mooted preliminary regulation is that futures may only be used by foreign institutions to hedge existing risk.

The US dollar/Indian rupee futures at Mumbai’s Multi Commodity Exchange Stock Exchange and the National Stock Exchange of India have soared to become the two most actively traded currency derivatives on any exchange in the world by number of contracts.

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