India moved a step closer to liberalizing its foreign exchange market with the launch of rupee currency futures trading on the National Stock Exchange on August 29. Initial activity was brisk, with about 70,000 contracts changing hands in the first session. The NSE contracts are extremely small by international standards – they have a notional value of just $1,000 – and would appear to be very much aimed at attracting retail participation. Perhaps not surprisingly, early trading was dominated by banks and large corporations.
According to the NSE, the first trade was transacted by East India Securities, although presumably there was also someone on the other side of the deal. The largest trade was by Standard Chartered Bank and was for 15,000 contracts, worth a nominal $15 million. The NSE says that so far about 300 trading members, including 11 banks, have registered in its new currency segment.
Although the launch of the futures onshore does mark a big step in liberalization, relatively tight controls remain in place. Initially, only rupee futures against the dollar have been allowed to be listed, and these can only extend out as far as one year in maturity. Furthermore, only Indian residents are allowed to trade the contracts and no other agency, including banks, can participate in the futures market without prior regulatory approval. Local traders are not allowed to run positions bigger than $25 million or greater than 15% of the total open interest. Banks, however, are allowed to have exposure as great at $100 million.
After the initial flurry of activity, trading eased off a little. On September 3, about 42,000 contracts traded and open interest – arguably the best indicator of a contract’s popularity – had climbed to about 27,000 lots in the front-month contract. Both the Bombay Stock Exchange and the Multi-Commodity Exchange are now likely to list similar contracts, so no doubt the NSE will hope that it has gained first-mover advantage, at least domestically – the Dubai Gold and Commodities Exchange (DGCX) launched rupee futures more than a year ago on June 7.
No upsetsHowever, as reported at the time in the Weekly FiX, although the exchange trumpeted the contracts’ merits, the Reserve Bank of India was unwilling to see the rupee trade outside of its control. Few banks with an onshore presence in India have been prepared to upset the central bank and support activity on DGCX and it seems that even the presence of a large Indian community in the Gulf has not been enough to stimulate activity in the contracts.
Looking ahead, Indian newspapers are already reporting that the Securities and Exchange Board of India is considering whether to allow introduction of rupee contracts against the euro and against the yen, as well as allowing interest rate futures within the next five months. Sebi is also apparently considering raising the open-position ceiling and allowing greater foreign participation.