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Volumes on the Exchange Traded Currency Derivatives (ETCD) have seen a sharp surge this calendar year. In the first 11 months of 2018, the combined turnover on the Bombay Stock Exchange and the National Stock Exchange (NSE) was ₹132.24-lakh crore; 65 per cent higher than the ₹80-lakh crore turnover recorded in 2017.
The pace of increase on the exchanges is much higher than what is seen in the inter-bank over-the-counter (OTC) market. Data available up to August show that the foreign exchange turnover (merchant segment) on the OTC market increased 12 per cent to ₹135-lakh crore from ₹120-lakh crore over the same period in 2017.
Limit relaxation
The major reason for the strong surge in the volumes on the exchanges could be the Reserve Bank of India’s decision to relax the position limits allowed on the ETCD. In February, the RBI increased the total position limits that can be taken without establishing any underlying to $100 million in all rupee derivatives together, combined across all exchanges. Earlier, this limit was set at $15 million per exchange for the USD-INR pair and $5 million per exchange for EUR-INR, GBP-INR and JPY-INR combined.
The central bank’s move has seen the average monthly turnover surging to ₹2.6-lakh crore from ₹1.6-lakh crore on the BSE. On the NSE, monthly turnover grew from ₹1.9-lakh crore to ₹3.2-lakh crore.
Sharp volatility
The second factor causing the spike in exchange turnover is the rupee’s volatile movement. The currency tumbled over 14 per cent against the US dollar to make a record low of 74.48 in October. However, it recovered sharply by over 5 per cent and is currently trading at 70.86. Sharp movement in the currency usually tends to attract more trading interest.
The divergence in the volume growth between exchanges and the OTC market also suggests traders are getting more active in the rupee contracts. Since the inter-bank OTC market is largely used by hedgers, the smaller growth in volume in this segment suggests that the rupee’s gyrations this year have not yet driven companies to take more cover.
Within the ETCD, the USD-INR pair accounts for a larger share of the total volume: over 85 per cent. EUR-INR and GBP-INR contribute about 10-12 per cent and JPY-INR about 2 per cent.
The major currency pair (EUR-USD, USD-JPY and GBP-USD) derivatives introduced earlier this year seem to have found no takers. BSE data show that the volumes are nil over the last couple of months; on the NSE, volumes have come down sharply.
Anindya Banerjee, Deputy Vice-President, Currency and Interest Rate Derivatives, Kotak Securities, says, “Hedgers and businesses having direct exposure to major currencies like the EUR-USD are minimal and those who need it prefer the OTC market to meet their requirements.”
A Treasury Head in a leading private bank, who did not want to be named, blamed the lack of traction in newly- launched derivates on an inadequate understanding of the factors that move major currencies. “Speculators and retail participants are still not comfortable with the non-rupee currency pairs, which is also one of the reasons,” adds Anindya.
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