New entrants to fuel currency futures volume

The currency futures market is set to see a big jump in volume and open interest (OI) in coming days as more exchanges begin operations and competition intensifies.

Currency futures trading was inaugurated on the MCX Stock Exchange (MCX SE) on Monday. The exchange will begin trading from tomorrow.

It is more than a month now since exchange-traded currency futures began operating in the country. The National Stock Exchange (NSE), the Bombay Stock Exchange have already rolled out trading in currency futures.

MCX SE has signed up over 870 members, including 22 banks from the private and public sectors and foreign banks, in just two weeks.

MCX-SE Chairman P G Kakodkar said "We are happy the government has taken a forward-looking decision by giving permission to launch the exchange traded currency derivatives at the right time."

A month of trading has seen a considerable rise in volume and OI (contracts where transactions are yet to be closed), high enough to attract hedgers. NSE’s volume has crossed past Rs 400 crore in the last two days, with 88,000 traded contracts.

The OI is now above 1 lakh contracts, valued at nearly $123 million (Rs 565 crore). The daily average volume, which was Rs 160 crore in the first week of trading since currency futures started, has risen steadily to Rs 360 crore last week. The OI of 31,311 contracts has shot up to 122,922 contracts during the same period. Market observers see this as a good beginning, but hasten to add that more liquidity and higher OI are needed to attract genuine hedging interest.

BSE began trading in currency futures last week and, in the last two days, it registered a total volume of Rs 448 crore and an OI of 8,797 contracts.

“The high open interest vis-à-vis turnover (in currency futures) means that actual users are already in the market and appreciate the value proposition,” said Jayant Manglik, who heads commodities business of Religare.

NSE will face stiff competition from BSE and MCX SE, even as the National Multi Commodity Exchange (NMCE) has applied to the Securities and exchange Board of India (Sebi) for currency futures trading.

MCX SE is expected to benefit from the commodity trading platform of MCX as there is a direct link between commodity and currency markets. Crude oil, bullion and metals account for a chunk of traded volumes on commodity exchanges and the rupee-dollar rate has a bearing on their prices, reflecting the significance of currency futures.

“Nearly 100-odd large corporate entities are hedging on commodity exchanges and they are also potential hedgers on currency futures as most of them are affected by currency movements,” said Atul Shah, head (commodities), Emkay Commotrade.

It will take some time for exchange-based currency futures trading to pick up as banks and companies are currently active on the currency forwards market, which is an over-the-counter (OTC) trading platform. Exchange-traded futures are transparent and more efficient compared to the OTC market.

Experts see a rise in volume and OI bringing in traders to exchange-traded currency futures.