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Foreign Exchange

RBI to allow futures

The Reserve Bank of India (RBI) published its Report of the Internal Working Group

On Currency Futures this week. In a nutshell, the central bank says it will allow the introduction of currency futures based on the rupee (INR).

“In sum, as the Indian economy becomes more open to the forces of globalization, the liberalization in the currency market segment with appropriate checks and balances and adequate regulations with a focus on implementation and supervision would help the Reserve Bank to conduct its monetary policy in a more flexible manner. The argument for going ahead with a currency futures market is that it provides an additional instrument in the market and enables participants to manage their risks prudently thereby contributing to smooth functioning of the markets. At the same time, it generally facilitates the conduct of policy and not necessarily impedes it, though the risks from dollarization and increased exchange rate volatility could arise. If currency futures add to the degree of dollarization in the economy, the risks in the form of exchange rate volatility would also grow,” the RBI writes.

“Appropriate product design, risk management, monitoring and surveillance, could help introduce the currency futures while minimizing the above risks such that in net terms the risks are outweighed by the benefits and lower exchange rate volatility is achieved through currency future products,” it adds.

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