Central bank says no to FIIs in currency futures

The Reserve Bank of India (RBI) is not in favour of foreign institutional investors’ entry into currency derivatives, even as the futures market for currencies and commodities segments continues to grow strongly.

In a joint meeting of regulators comprising RBI officials and the Securities and Exchange Board of India (Sebi) recently, the RBI expressed unwillingness to allow FIIs into currency derivatives and commodities futures where even domestic institutional players are not allowed entry. FII entry into currency derivatives was favoured by P Chidambaram when he was the finance minister.

Average daily volume of currency derivatives for the current month till last week was Rs 30,190 crore on the MCX Stock Exchange and National Stock Exchange (NSE). In April 2009, it was Rs 4,677 crore.

FIIs are active in the equity derivatives market on NSE and hold one-third of the total gross open interest and 10 per cent share in average daily turnover. Looking at this strength, the RBI has shown the unwillingness.

The central bank has also shown apprehension about allowing delivery-based settlement in currency futures. Currency futures are settled in cash, like equity derivatives. However, market players hedged on their currency requirement on the exchanges, are required to enter the second deal in cash market at the time of receiving or making an actual delivery of foreign exchange. To avoid this double effort, proposal was made to the regulator to allow option of delivery-based settlement in currency derivatives.

Proposal was such that on certain days before the settlement, players could disclose to the exchange that they wanted to take or give delivery as the case may be. Once both intentions matched, the recognised banks could ensure the transaction. This practice is prevalent on the commodity exchanges. But the RBI is understood to have said at the meeting that anything that could affect inflows or outflows of foreign currency from the country should not be considered as of now.

While discussing the currency derivatives issues, the regulators also decided to consider whether options could be permitted in the segment. Sebi is said to have sought views of the stock exchanges in this regard.