The Hindu : Business : Currency futures trading for residents mooted

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Saturday, Nov 17, 2007
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Currency futures trading for residents mooted

RBI report comes in the backdrop of volatile forex market

Dedicated exchanges for trading
A single contract of $1,000 suggested

MUMBAI: An expert group appointed by the Reserve Bank of India on Friday suggested introduction of currency futures trading for local entities without any monitory limits in the initial phase for enabling them to hedge foreign currency risks.

Non-resident Indians (NRIs) and foreign institutional investors (FIIs) with suitable trading limits could be allowed later to participate in currency futures, the RBI’s Internal Group on Currency Futures said in a report.

A futures contract is a standardised contract, traded on a futures exchange, to buy or sell a certain underlying instrument on a certain date in the future, at a specified price.

The RBI has sought comments from the public onthe recommendations.

Framework

The report comes in the backdrop of volatility in the currency exchange market. The rupee has risen by more than 12 per cent against the U.S. dollar in 2007 alone, hurting the country’s exports.

The group also recommended establishment of dedicated exchanges for trading in currency futures to help companies and traders hedge foreign currency risks.

Tenures of contract

Currency futures, which are aimed at providing a wider menu of hedging options to entities, should be introduced through a single contract with a notional value of $1,000. The tenure of the contract should be 12 months.

Low value contracts in the standard format would encourage retail participation and add liquidity in the futures market.

As the rupee is not fully convertible, the group suggested that settlement of contracts should be on the cash basis based on the RBI’s spot reference price.

The group also suggested no quantitative restrictions on trading should be imposed on residents to trade in currency futures, though in the case of non-residents the participation should be allowed in a gradual and phased manner.

The group proposes that the contract may be allowed to expire on the first working day after the fifteenth day of every month. — PTI

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