'Currency Futures is an important step towards full convertibility'

NSE managing director & CEO Ravi Narain tells Shruti Kohli that individuals account for nearly two-thirds of the volumes in Nifty futures and believes they will be active in currencies also.

Ravi Narain, managing director & CEO of the NSE
Ravi Narain, managing director & CEO of the NSE

The NSE introduced currency futures recently and the BSE plans to do so from 1 October. Though retail investors haven’t entered this market in a big way, NSE managing director & CEO Ravi Narain tells Shruti Kohli that individuals account for nearly two-thirds of the volumes in Nifty futures and believes they will be active in currencies also.

Q. What was the logic behind the launch of currency futures in India?
Both resident Indians and corporate entities are open to currency exposure, whether they buy or sell foreign currencies. Currency futures allow them to actively manage these risks. It also adds a key component to complete the suite of products available to resident Indians. Currency futures, which are settled in cash (in rupees), is an important step towards full convertibility.

Q. What is the response of individual investors to currency futures?
The Indian market has a culture of strong retail participation in trading equities and commodities. In Nifty futures, individuals contribute 60-65% of the total volumes. We believe they will be active in currencies also. Individuals were involved on the first day, though in small numbers. Corporates and banks will continue to play a big role in the currency futures market.

Q. Is the $5 million limit for retail investors enough?
The limit for individual investors is $5 million or 6% of open interest, whichever is higher. As the market grows, the ceiling of 6% of open interest will come into play.

Q. The Indian currency is regulated. Can there be true price discovery in such a regulated market?
Regulations exist in all markets. If you see the movement in dollar-rupee spot and derivatives, you will observe very good price discovery.

Q. What is the NSE doing to educate small investors about the risks related to currency futures?
We have initiated awareness programmes similar to those on equity derivatives. These workshops will cover not just retail investors but small- and medium-sized corporates as well. Our investor awareness programmes will instil confidence and enable investors to assess the risks properly.

Q. Is there a separate mechanism for dealing with the investors’ grievances in currency futures trade?
Yes, we have set up a separate investor grievance mechanism for the currency derivatives segment. An investor has to fill up a form (available at any of the NSE offices) and submit it at the office. Such a grievance redressal mechanism has been in place for all other products as well.

Q. There’s a belief that at this juncture currency futures trading may heighten exchange rate volatility rather than reduce it. What do you feel?
Due to restrictions on the over-the-counter (OTC) market, entities running derived or indirect exposures have been unable to hedge through that channel. Making available a tool to this segment of users will contribute positively to overall risk management. Additionally, the margining and daily mark to market discipline is a strong risk management system. The first few days of trading show that the spreads on currency futures are far tighter than the spreads in the OTC market. This augurs well for both the markets.

Q. Currency futures have been introduced for only one foreign currency, the US dollar. How soon can we expect trading in other currencies?
We believe that once the first currency pair—rupee-dollar— stabilises, the regulators will look positively at introducing other currency pairs.

Currency Futures FAQs

Whether you send dollars overseas, import, export or invest abroad, currency futures can help manage risk. Learn how to use them.

What are Currency Futures?
Currency futures are contracts to buy or sell a foreign currency at a future date at a predetermined price. Right now, only the US dollar futures can be traded.

How are futures different from forward contracts?
You can buy a forward contract only if you are affected by the future movement of the dollar. So, only importers, exporters and banks can trade in currency forwards. On the other hand, anyone can buy a futures contract.

How much do I have to pay as margin?
Currency futures contracts are available in lot sizes of $1,000. The margin required is 1%. So one futures lot of $1,000 would mean a margin of $10 (roughly Rs 460).

Futures contracts are traded for how many months in advance?
Futures of up to 12 months are available. But most of the trading is done in the near-month contracts. A contract expires on the last working day of a month and the RBI reference rate is taken as the final settlement price.

Can I hedge against the dollar rate?
The current dollar rate is Rs 46. If you think it will rise to Rs 48 by December, you can buy a currency futures contract of $1,000 at Rs 46. If the dollar rises, you sell the contract for a profit. On the other hand, if you think the dollar will decline to Rs 42 in the next two-three months, you sell a futures contract of $1,000 at Rs 46. If the dollar falls to Rs 42, you buy a futures contract and make a profit.

How are the profits taxed?
Profits from trading in currency futures are treated as business income and taxed at 30%. There is also a 10% surcharge and a 3% education cess on the payable tax, so the total tax comes to 33.99%.