As published on deccanherald.com, Friday 8 May, 2020.
Two exchanges -- India International Exchange (IFSC) Ltd. and NSE IFSC Ltd. -- on Friday began trading foreign-exchange settled rupee derivatives, part of a push to bring the market back home.
The launch comes amid the world’s most expansive coronavirus lockdown, which has crippled businesses and hurt trading volumes in the country’s financial markets. The timing may make it harder for the contracts to gain traction even as volumes in rupee trading overseas continue to grow.
“Volumes in an exchange typically take time to pick up,” said Abhishek Goenka, chief executive at India Forex Advisors Pvt. “The bid-ask spreads have to come down and a lot of market-making has to happen to get decent activity.”
India’s policymakers have been increasingly concerned about the growing heft of the rupee trades in venues overseas. The average daily volume for the rupee in London totalled $47 billion in April 2019, according to the Bank for International Settlements. That’s a fivefold jump from 2016, and more than the $34.5 billion of trades executed locally at the time.
Finance Minister Nirmala Sitharaman launched trading on the two exchanges, both of which are located at a special hub in the GIFT City in western India, envisioned by then Gujarat chief minister Narendra Modi to rival Singapore as a financial services centre.
“This new reform will help India to become a net exporter of financial services, presently being lost to other financial centres across the world,” said Tapan Ray, managing director and group chief executive at GIFT City said.
Offering onshore rupee derivatives is similar to what Indonesia attempted in 2018, when it launched non-deliverable forward contracts settled in rupiah.
While the forex-settled rupee derivatives may take time to take off, the move will help the Reserve Bank of India get a better grip on the working of the NDF market and help investors get better quotes than the spreads they are charged offshore, India Forex’s Goenka said.
INX India, one of the exchanges launching the contract, is looking at positioning itself against venues in Singapore or Dubai offering similar rupee contracts. The lot size for a standard contract on INX is one million rupees while the NSE has it at two million rupees.
“This is a rock star product for us,” said V Balasubramaniam, chief executive at INX India. “We are looking getting at least 50% of volumes generated by these exchanges in the first quarter of operations.”
The RBI has allowed local banks to participate in the offshore currency market from June 1, which could pose another obstacle to onshore contracts from becoming popular, analysts say.
NDFs, nominally a tool for hedging, are popular with investors who want to bet on the currency without taking delivery. They’re often used in major financial centers in place of currencies that don’t trade round-the-clock.
Some central banks have blamed NDFs for causing disruptions in local markets when spreads widen overnight. In March, the spread between the one-month onshore and offshore dollar-rupee contract widened by more than one rupee, compared with a gap of less than 10 paise seen normally, according to data compiled by Bloomberg. The spread was at 23 basis points on Friday.
The onshore currency market should be kept at distance from the NDFs to weaken the transmission of speculation, said Ananth Narayan, a professor of finance and former South Asia head of financial markets at Standard Chartered Plc.
“I would prefer if the bridges between the onshore and offshore were made thinner,” he said. “Entities with genuine interest should be encouraged to trade onshore by easing hedging rules.”