The Indian investing community and the corporate sector have now got a new financial product— currency futures. It will allow them to take a bet on the future movement of one currency against another. Investors will be able to protect their portfolios while companies will be able to hedge their export receivables or import payouts, against currency risk fluctuations.
Till now, companies could hedge the forex risk on their balance sheets by entering into contracts with banks in the over-the-counter (OTC) market. However, investors didn’t have access to a standardised and exchange-traded instrument that could protect them against currency risk.
At the outset, only rupee-dollar denominated futures with a minimum ticket size of $1,000 (Rs 43,000) will be allowed. Later, other currencies will be allowed as well. The guidelines allow only retail investors, banks and companies to participate in the currency futures market; foreign institutional investors (FIIs) may be allowed in future. The dollar-denominated rupee futures first debuted on Dubai Gold and Commodity Exchange, which is partly owned by MCX, in 2007. After recording reasonably large volumes in first few months, the trading interest in this product seems to have waned now.NSE’s rupee-denominated futures got off to a promising start, with more than 65,000 trades worth $65.8 million (Rs 283 crore) on the first day of its launch. Forex expert A.V. Rajwade believes that the long-term popularity of currency futures will depend on whether such transactions are subject to securities transaction tax or capital gains tax.
If Finance Minister P. Chidambaram’s statement on the day of launch of currency futures is any indication, more new products, like credit derivatives, could be launched soon. “The global financial markets have produced many new products. In India, we adopted these products with considerable success,” Chidambaram said.
The launch of currency futures on the National Stock Exchange moves India a step further towards financial sector liberalisation. There was a long-standing demand from institutional investors and academics for the product.
Chidambaram, in the Union Budget, had agreed to introduce it in India soon. Currency futures were also recommended by the high-level committee on Making Mumbai a Financial Centre chaired by Percy Mistry.
Over the next few months, two other exchanges, the Bombay Stock Exchange and the Multi Commodity Exchange, will start offering currency futures. Brokerages are also expected to offer the facility to their investors and some are even willing to initially offer trading facilities without any brokerage fees.
While currency futures have been launched with much fanfare, it remains to be seen whether investor interest in the product will sustain. After all, interest rate derivatives, which were launched in 2003, have not taken off yet.