Indian Forex Market Matures

The Reserve Bank of India (RBI) has allowed futures trading in three more currencies — the euro, the pound sterling and the yen – with immediate effect. This move comes nearly a year-and-a-half after trading in the Dollar-Rupee futures contracts was kick-started on recognized stock exchanges.

This decision marks a maturing of the forex market in India. This will provide more flexibility to exporters and importers to hedge their risks against volatility in exchange rates.

Markets regulator Securities and Exchange Board of India (Sebi), in a separate statement, has allowed exchanges to introduce currency futures in three more currencies — euro, yen and pound. “It has now been decided to permit eligible stock exchanges to introduce currency futures on euro-INR (Indian rupee), pound sterling-INR and yen-INR,” Sebi said in a circular. The RBI also said the bourses are permitted to offer currency futures contracts in the three pairs in addition to the US dollar-rupee contracts.

India's exchanges will now be allowed to launch futures trading in euro-rupee, pound sterling-rupee and yen-rupee. The decision fulfils a promise by the RBI in its last monetary policy review and is expected to greatly facilitate market players hedging cross-currency risks. Today, the bulk of our trade - both exports and imports - is invoiced in dollars.

According to estimates by market players, around 20 per cent of the currency trades in the over the counter (OTC) market is done in non-dollar currency. This means the move will increase volumes on the exchange platform manifold.

The two leading exchanges, NSE and MCX-SX, plan to soon introduce trading in the new currency pairs. Trading in currency futures was first kicked off on the NSE in late August 2008. Within a couple of months, trading in currency futures was launched on MCX-SX and BSE.

"This will improve liquidity further and facilitate price discovery better for non-dollar pairs," stated R K Gurumurthy, head of treasury at ING (NYSE:ING)Vysya Bank.