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Popular FX derivatives market headed for a crushing blow in Indian market

Submitted by admin on April 3rd, 2024

A new rule that will take effect on April 5 is likely to drive out most of the active players from the market, which will dry up volumes that already scaled up to $5 billion a day.

The market for exchange-traded currency derivatives in India is undergoing a booming phase. Unfortunately, the growth is to suffer a crushing blow.

Brokers have already started asking their clients to close out all contracts after exchanges on Monday reasserted the RBI’s ruling mandating an actual foreign exchange exposure for participants. It rules out individual speculators and traders who form a large block of the volume.

“At least 70% or more of the volume will dry up — half the market is arbitragers,” said Sajal Gupta, the executive director and head of forex and commodities at Nuvama Institutional. “Those traders won’t take fresh positions and have to square off existing positions,” he added.

The rule is in keeping with the Central Bank’s broader foreign exchange management policy that has prompted the authority to reduce swings in the rupee before the country’s bond markets are included in the global indexes from June. Of all the emerging marketing currencies throughout the globe, the rupee has been one of the most stable ones.

Whether rupee-based currency exchanges plummet below $100 million traded on the BSE Ltd and National Stock Exchange, which forms the crux of the matter, requires a thorough exposure.

On Monday, the exchanges re-asserted the RBI’s circular, which was released on January 5, regarding the mandatory requirements, shocking market participants with unhedged positions.

RBI sent a mail to the Commodity Participants Association of India on March 28, stating that if anyone without an actual exposure undertakes such contracts, the action will breach foreign exchange rules, as per a Bloomberg News report, referring to people familiar with the matter.