Settlements of currency forwards soar

Quarter-closing rush, high volatility in foreign exchange rate, RBI steps to curb speculative trading see volumes rise to $107 bn in Dec.

The rush at the end of the December quarter, the high volatility in the foreign exchange rate and steps taken by the Reserve Bank of India (RBI) to curb speculative trading led to a sharp rise in the settlement volumes of currency forwards in December.

A currency forward is a derivative transaction in which the actual settlement takes place at a future date, at a specified rate. It is traded over the counter.

According to data from the Clearing Corporation of India, the volume rose to $107 billion last month, 33 per cent higher compared to November and 43 per cent higher compared to the year-ago period. The segment recorded the highest volume in a span of 13 months.

Before the revision in norms by RBI, traders could cancel and rebook forwards before the expiry of the contract. Increased downward speculations on the rupee added pressure to the currency’s exchange rate against the dollar. The rupee touched its all-time low of 54.3 against the dollar in December, following which RBI withdrew the facility.

“Traders let open positions lapse in December, instead of carrying them over to next quarter,” said a foreign exchange dealer with a private sector bank. Data showed currency forwards worth $96 billion were settled in the last week of December.

On December 15, RBI said forward contracts booked by residents once cancelled, could not be rebooked. Typically, any cancellation in a forward contract before the expiry takes into account the mark-to-market value and the forward margin. The central bank had said any exchange gains on cancellations should not be passed on to the customer.

However, it had allowed the rollover of forwards. In case of a rollover, only a portion of the contract is liquidated and the balance continues. Traders can roll over the contract to a future date, with the same terms and conditions, before the expiry. However, data suggests otherwise. “It was the quarter-end, and the rupee was at its all-time low. This would have discouraged people from keeping positions open,” said a foreign exchange consultant with a domestic brokerage.

Volumes indicating open positions in exchange-traded currency futures contracts also fell from 350,000 to 250,000 in the last few days of the quarter ended December.

RBI had also reduced and imposed limits on the net overnight open position limit of authorised dealer banks. This helped reduce the one-sided movement in the rupee-dollar exchange rate.

Since the beginning of this month, the rupee appreciated 4.4 per cent against the dollar, despite the greenback strengthening against the euro in the same period.