FIIs in exchange-traded derivatives

The move will allow them to cover currency risk

Finance Minister P Chidambaram’s proposal to allow foreign institutional investors (FIIs) to trade in exchange-traded currency derivatives will help them cover  currency risk, while improving the liquidity situation in India’s currency exchanges.

FIIs will be able to participate in the segment to the extent of their rupee exposure in India.

Besides being present in equities, FIIs’ engagement in India has also been growing in the debt market. They invested Rs 1.42 lakh crore in Indian debt instruments in the last five years (2008-12). In 2013 so far, they have pumped in Rs 6,500 crore. So, they need more avenues to hedge their currency risk.

At present, the currency risk was partly being hedged by them in the non-deliverable market (NDFs) outside India. From the next financial year onwards, FIIs will be able to manage this risks in an orderly manner in India. Thus, experts believe FIIs’ hedging activity will move onshore. Perhaps, this will also lead to an increase in volumes in the market, reduce 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.