India exchange to debut rupee derivatives settled in US dollar

Launch of onshore futures and options unlikely to dent offshore volumes, though

Hawa Mahal or Palace of Winds - Jaipur - India - Getty.jpg

An exchange in India is preparing to launch a suite of Indian rupee derivatives, four months after the country’s central bank relaxed the rules on onshore trading of currency derivatives settled in foreign currencies. 

The move has been met with scepticism from market participants, who expect the majority of Indian rupee derivatives activity to remain offshore.

The India International Exchange is, nevertheless, hoping for a rapid rise in rupee derivatives trading on the exchange once new contracts that can be settled in US dollars are launched on its foreign exchange platform.

“We will make efforts to build good liquidity,” says Venkataramani Balasubramaniam, managing director and chief executive of India INX. “Approximately 50 trading members of India INX are active and would participate on this product from day one.” 

The planned product launch comes after the Reserve Bank of India (RBI) announced last October that it would allow the onshore trading of Indian rupee listed derivatives settled in foreign currencies, starting with listed futures and options. The trading must take place in international financial services centres (IFSCs), such as the Gujarat International Finance Tec-City, where India INX is based. IFSCs are special zones that allow for foreign currency transactions. 

Daily average turnover of rupee-denominated derivatives in the onshore market stood at $18.6 billion in April 2019, representing 22% of all rupee-denominated derivatives traded globally, Bank for International Settlements data shows. This is down from 45% three years previously.

Trading of rupee-denominated futures and options and over-the-counter currency derivatives is permitted onshore, but convertibility restrictions on the currency mean foreign users of the contracts have faced difficulties switching them back into their home currency. 



Instead, many foreign users turn to non-deliverable forwards (NDFs), which are settled in US dollars and don’t involve physical exchange of rupees. They are traded in offshore centres, such as London and Singapore. 

The RBI is said to be concerned about the growth of offshore markets in recent years, and allowing contracts to be settled in foreign currencies is seen as a move to lure trading back to India. Global volumes of rupee derivatives leapt to $83.6 billion in 2019, from $38.6 billion three years earlier. Trading of NDFs is known to sometimes influence rates in domestic markets in times of turbulence. 

“The central bank is trying to stop this trend,” says an FX sales head at a European bank in Hong Kong. “They don’t want to see a lot of trading offshore.”

The RBI did not respond to a request for comment.

Customers may manage their risk instantly instead of waiting for the next day
Smrithi Nair, Juris Corp

India INX initially plans to offer US-dollar settled futures and listed options contracts in the USD/INR currency pair, once the contract specifications have been approved by the local financial regulator, the Securities and Exchange Board of India, and authorised by the RBI. On February 10, Sebi issued a circular setting out position limits for market participants trading rupee derivatives in IFSCs.  

Balasubramaniam says approval is expected to come soon, and additional currency pairs may be introduced in phases in the future, subject to the requisite regulatory approvals.

Key drawcard

The exchange is already registering demand from IFSC-registered banking units, which include domestic firms but also local units of foreign banks, and also expects to see significant usage from foreign investors. The tax-free status of the IFSC and its lighter know-your-customer requirements are a key drawcard, says Balasubramaniam.

The RBI’s recent extension of trading hours for rupee derivatives, announced on January 6, could also make it easier for overseas investors to trade derivatives in the IFSCs, says Smrithi Nair, a senior associate at law firm Juris Corp in Mumbai. Trading can now take place around the clock on trading days.

“With RBI’s recent move to permit banks to undertake transactions beyond onshore market hours, IFSCs can match the timings at which their trading desks are available with those of offshore markets, thus extending the liquidity in the FX market until late in the night,” says Nair. 

“Customers may manage their risk instantly instead of waiting for the next day, during days on which, due to important political events and decisions, rupee reacts a lot along with other currencies.”

Less convenient 

Some market observers still doubt the benefits of trading foreign currency-settled futures and listed options are enough to outweigh the convenience offered by offshore NDFs. 

“[The RBI] may want to bring global risk on the currency to India, but more is going to be required for that to happen,” says Jayesh Mehta, managing director and country treasurer at Bank of America India. 

For onshore rupee-denominated derivatives, any measures short of full convertibility of the currency are unlikely to lure foreign investors away from NDFs, he adds. 

Stephen Chiu, an Asia FX rates strategist at Bloomberg in Hong Kong, doesn’t believe foreign firms will be keen to use the IFSC-based listed contracts. “Overseas investors will feel more comfortable trading over-the-counter – mainly NDFs – given that prices could be more market-driven and face less intervention risks from the local exchanges,” he says.  

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