FIIs allowed to trade in exchange-traded currency derivatives

Move will allow them to cover currency risk; will also improve liquidity in India's currency exchanges

Foreign Institutional Investors (FIIs) will now be allowed to trade in the exchange-traded currency derivative segment. They will be able to participate to the extent of their Rupee exposure in India.

Besides presence in equities, FIIs engagement in India has also been growing in the debt market. FIIs have invested Rs 1.42 lakh crore in Indian debt instruments in the last five years (CY2008-12). In CY2013 so far, they have invested Rs 6,500 crore. So, they need to more avenues to hedge their currency risk.

At present the currency risk was partly hedged by them in non-deliverable market (NDFs) outside India. Now, FIIs will be able to manage these risks in an orderly manner in India.

Thus, experts believe that FIIs' hedging activity will move onshore. Perhaps, this will also lead to an increase in volumes in the market, reduce the volatility and improve price discovery.

The average daily turnover in currency derivatives - forward and options market has been about Rs 41,000 crore in February, up from Rs 25,500 crore in April 2012.

Three exchanges – National Stock Exchange, Muliti Commodity Exchange – forex segment and United Stock Exchange offer facility trading in currency derivatives.