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RBI allows foreign portfolio investors in currency derivatives

In a bid to improve the depth and liquidity in the domestic foreign exchange market, the Reserve Bank of India (RBI) in its bi-monthly monetary policy review allowed foreign portfolio investors (FPIs) to participate in the domestic exchange-traded currency derivatives market. The arrangement has been made to the extent of their underlying exposures and an additional $ 10 million.

Besides, the central bank also allowed domestic entities with a similar access to the exchange traded currency derivatives market. RBI shall issue detailed operating guidelines pertaining to the same separately.

“The intent is to bring off-shore (unregulated) Non-Deliverable Forward (NDF) flows into on-shore Exchange-Traded Fund (ETF) platform en-route to the Over-The-Counter (OTC) platform on which RBI has absolute control. It is a fair step allowing off-shore investors not only to hedge underlying exposures but also allow view-based trading up to $ 10 million,” said Moses Harding, group chief executive officer (liability and treasury management) & chief economist of Srei Infrastructure Finance.

However, Harding added that it was too early to take a view on the extent of shift from NDF to on-shore ETF/OTC which is subject to operational convenience and extent of liquidity in NDF platform from non-Indian investors.

Bankers are now waiting for detailed operating guidelines as they seek more clarity. “Allowing FIIs to hedge their underlying plus $ 10 million is one step forward towards deepening and broadening the market. If domestic entities are also given the same facility then clarification is needed as to how this will coexist with their OTC transactions with banks against same underlying. Currently banks cannot participate in currency future on their own account. This restriction needs to be removed for the overall development of the market,” said Mohan Shenoi, president – group treasury and global markets, Kotak Mahindra Bank.

In July RBI had imposed restriction on banks with regard to trading in currency futures and options. Under the step banks were barred from trading in currency futures and exchange traded currency options market on their own. They were however, allowed to trade on behalf of their clients. The move was taken to arrest volatility in the exchange rate.

Market players said that the move to allow FPI, coupled with recent lifting of curbs on currency trading, will boost liquidity in the exchange-traded currency derivative—offered by NSE, BSE and MCX-SX. At present, only Indian residents were allowed to trade on the currency derivatives segment.

Trading volumes in exchange-traded currency derivatives had witnessed a sharp fall last year after Sebi and RBI had imposed strict curbs, such as doubling of margin requirements and ceiling on position limits.

The combined monthly turnover at the three exchanges had come off from its peak of Rs 64,039 crore witnessed in June last year to below Rs 15,000 crore. However, after removal of some of the curbs by the regulators, the average volume in the month of May once again climbed above Rs 20,000 crore.

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