RBI Gives Leeway to Foreign Portfolio Investors in a Bid to Bolster Onshore FX Trading

Indian central bank opens doors for foreign firms hedging in FX derivatives to manage currency risk. Foreign Portfolio Investors were

rbiIndia’s uncertain currency markets were given a dose of good news as the country’s central bank explores new ways to stabilise the rupee and boost activity. The main body that governs foreign exchange, the Reserve Bank of India (RBI), issued a notification that gives foreign investors an early summer treat. Foreign Portfolio Investors will be allowed to hold limits of up to $10 million, when trading FX futures or options.

The news was welcomed by institutional investors as currency risk in light of the 2013 rupee crisis, where the rupee traded at a record low against the greenback, was a major cause for concern. The move is expected to give a new level of support to speculators as real value investors enter the FX markets.

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India’s onshore FX derivatives market was established in 2008 in response to unhedged exposure by India’s growing corporate sector. Banks offer forwards and swaps,  however, the non-existence of a genuine hedging tool was causing a rift among participants. The 2008 move came after the world’s first offshore rupee derivatives contract was launched by UAE-based DGCX, a derivatives exchange founded by one of India’s most influential financial technologists, Jignesh Shah.

The DGCX serves the needs of a large number of expatriate Indians living in the UAE, furthermore, restrictions in India are tackled by firms who take advantage of the UAE’s free market and open business rulings.

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The rupee has recovered from its 2013 lows which saw the currency plunge 20%, reforms by newly appointed central banker, Raghuram Rajan, and the optimism following the BJP government have favoured the currency (is range bound at 60 against the USD) .

Trading activity has been promising in INR futures, the DGCX reported positive metrics for the month of May, despite traders shying away during the election period.

Corporates can trade rupee futures at four participating exchanges, MCX and NSE were the pioneers during the 2008 launch, this was was followed by the USE and most recently BSE. India’s most historic exchange, the BSE, has seen a strong take-up by brokers and volumes have been growing exponentially.

On the other hand, MCX’s rupee futures contracts have seen a sharp decline in trading volumes due to the recent NSEL scandal. The exchange is promoted by Financial Technologies, the firm which was founded by Indian billionaire, Jignesh Shah, who was recently arrested for his firm’s role in the scandal. Industry participants believe there is witch-hunt against Mr. Shah, who has been plagued by competitors.

Forex Magnates believes that trading volumes in India’s currency markets will strengthen 5% year-on-year, as stability in both the economy and currency bring traders back to the market.

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