Traders will have more options to dabble in the Indian currency in Dubai. After the success of rupee futures trading, the Dubai Gold and Commodity Exchange (DGCX) will launch options contract in rupee-dollar from September 26.
This, say market players will put pressure on the domestic exchanges, as options contracts in any segment are much favoured due to less margin, and the competition will heat up. India’s Financial Technologies owns 44 per cent stake in DGCX.
In India, the National Stock Exchange, United Stock Exchange and MCX Stock Exchange together put average daily turnover of over Rs 25,000 crore in currency trading. Of that, around 70 per cent trading is done in rupee-dollar contracts.
In the past four months, the option volumes in currency futures in India, too, jumped to over 20 per cent of the overall currency volumes.
The domestic exchanges already face tough competition from the non-deliverable forward (NDF) market for currency based in Singapore and New York. Dubai was only adding to it.
While the turnover in Indian currency is still small in Dubai compared to that in the domestic market, the growth is alarming. Also, Dubai is a major hub for trade between Asia, Africa and Europe. A host of Indian diamond and bullion merchants have opened offices in the emirate. It is also reputed to be a major conduit for hawala operators.
“Trading in the Indian rupee is leaving India, as other offshore markets like the NDFmarkets are dominating. Domestic currency market should be aided to grow and protectionist measures should not be taken,” said Ajay Shah, economist at the Indira Gandhi Institute of Developmental Research. According to Shah, currency trading could witness a scenario similar to trading in Nifty futures, which had shifted to the Singapore exchange. Apart from India, the Nifty index is also listed in Singapore. The rupee-dollar futures contracts generate average daily trades of around Rs 1,500 crore on DGCX. Volumes are hitting new records every month and the rupee-dollar contracts have become the fastest growing derivative instruments on DGCX with a rise of over 16 times in 2011, compared to the last year.
The Indian currency contracts account for 60 per cent of the total trading volumes on DGCX and 90 per cent of the overall currency futures segment. According to DGCX, till June this year, the volume in rupee-dollar was over 6.5 million contracts compared to around 40,000 contracts traded in 2010.
Apart from the rupee, DGCX also trades euro, yen, sterling, Australian dollar, Swiss franc and Canadian dollar in combination with the US dollar. This year so far, currency futures have accounted for almost 70 per cent of the volumes on DGCX, which also trades precious metals. According to Jamal Mecklai of Mecklai Financial, the bulk of price discovery for the Indian rupee has migrated offshore and the onshore market closely follows its now full-grown foreign cousin (NDF market) as arbitrage channels have widened.
“Today, the NDF market is driving things. In April 2011, NDF volumes, at nearly $43 billion a day, were more than double those of the onshore OTC market (about $21 billion a day), and nearly 40 per cent higher than the combined OTC and futures onshore volume,” said Mecklai in a July 1 column in Business Standard.
Mecklai is of the view that most intra-day action in rupee-dollar takes place when Indian market is closed. “The offshore gap (the difference between any day’s Indian opening rate and the previous day’s closing) has been higher than the onshore gap (the difference between the day’s opening and closing in the domestic market) for the past four years. This means Indian companies could end up missing levels, particularly when the markets are trending.”
In Dubai, the size of the options contract in rupee-dollar will be Rs 20 lakh. Prices will be quoted in US cents per 100 Indian rupees, with a minimum premium fluctuation of 0.000001 US dollars per rupee ($2 per contract). At launch, the October 2011 expiry month will be available to trade.
Currency options are derivative instruments that give the buyer a right but not the obligation to execute specified transactions in the underlying currency pair. It gives the buyer the flexibility to execute settlement of options or not.
Eric Hasham, CEO of DGCX said, “The provision of an Indian rupee options contract will enable us to build on the exceptional volume growth achieved by our Indian rupee futures contract over the last 12 months and meet member demand to further strengthen our Indian rupee offering”.