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New Delhi and Mumbai: India's currency futures market may grow by 15 per cent to 25 per cent in the next 12 months, according to National Stock Exchange (NSE) of India Ltd., which became the first to offer the derivatives from on Friday.
Rivals Bombay Stock Exchange (BSE) Ltd. and the Multi Commodity Exchange (MCX) of India Ltd. will soon follow in offering the exchange-traded products, which enable investors to hedge their foreign-exchange risk, complementing the currency forwards and options agreements already available in India. Trading in all derivatives is currently restricted to the dollar-rupee pair.
The government is expanding derivatives trading to help investors cope with widening fluctuations in the rupee, which has traded at a decade-high and a 17-month low during the past year. The Reserve Bank of India raised its benchmark interest rate, the repurchase rate, by half a percentage point in July to 9 per cent, the third increase in two months.
"The realisation has increased that it is not only the interest rate that is a factor in an individual's economic life but also the exchange rate," Ravi Narain, chief executive officer of the Mumbai-based National Stock Exchange, India's biggest, said in an interview. "It will be a slow start," with potential for daily trading volumes to reach $35 billion, he said.
Futures contracts are agreements to buy or sell a currency, commodity or other financial product at a later specific price and date. Futures differ from forwards, assets bought and sold at current prices for later delivery, in that they are usually traded on an exchange. Options give the bearer the right to buy or sell a security at a specified date and price.
Initially, India will allow dollar-rupee futures with a contract size of $1,000 with cash settlement in rupees and a maximum maturity of 12 months.
East India Securities Ltd. struck the first futures deal buying 50 November contracts at 44.15 rupees a dollar for its client Budge Budge Refineries Ltd., the Mumbai-based brokerage said in a press release.
Volumes in the currency futures rose past $10 million, according to data compiled by Bloomberg from the National Stock Exchange.
"It will add more depth to the financial market," said V. Balakrishnan, chief financial officer at Infosys Technologies Ltd., India's second-largest computer-services provider. "It may provide cues to the spot market as it is more transparent." ICICI Bank Ltd. sold 100 September contracts for Infosys between Rs43.835 and Rs43.8375, Balakrishnan said.
Adverse impact'
Overseas acquisitions by Indian companies and exports of software services have increased the exchange-rate risk to local firms such as Tata Steel Ltd. and Infosys. Tata, the country's biggest maker of the metal, acquired the UK's Corus Group Plc for £6.2 billion ($11.3 billion) last year and Infosys this week offered to buy Axon Group Plc for £407.1 million.
Excessive volatility in the exchange rate can have an "adverse impact" on export performance and balance sheets, the Reserve Bank of India said in its report recommending the introduction of futures in June.
"It's a good complement to the existing structure and it is necessary to get the smaller segment, the retail investor, to get on in a price-efficient way," said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd. in Mumbai.
After opening the economy to international investors in 1992, India's gross domestic product has grown more than fivefold since 1994 to $912 billion, while foreign trade increased sevenfold to $317 billion, according to data compiled by Bloomberg.
Net capital inflows into the nation's stock market reached a record $17.2 billion in 2007 before global funds sold $7.3 billion more Indian shares than they bought this year.
Implied volatility on three-month dollar-rupee options climbed to a one-year high of 11 per cent on Aug. 26 from a 10- month low of 4.99 per cent on Feb. 4, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.
"This is the appropriate time to launch currency futures as a significant segment of the market has been left exposed to exchange-rate risk for too long," said Joseph Massey, chief executive officer of the Mumbai-based Multi Commodity Exchange.
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