Forward Cover For Spot Players In Phase-I Suggested

As measures to deepen the forex markets and integrate it with the overseas markets, the Tarapore Committee has suggested several measures designed to bring about liquidity in the spot and forward segments, reducing the need for central bank intervention, as well as increase the access of banks and corporates to the overseas markets for various transactions.

The committee has recommended that in phase one, all participants in the spot market such as foreign institutional investors, non-residents and non-resident banks having rupee assets may opt for the forward cover.

This will facilitate two-way expe-ctations to emerge in the market. Rates in the market will be determined more by the market participan-ts, reducing the need for central bank intervention.

 

In phase three, the committee has recommended the removal of restrictions on participation in spot/forward markets, in terms of underlying actual or economic exposures.

In order to increase the number of market makers who actively give two way quotes , the committee has recommended that all India financial institutions with comply with the specific criteria and fulfil the prescribed prudential and regulatory requirements may also be allowed to participate in the forex markets as full fledged authorised dealers during Phase I, and other non bank entities in phase three.

This will correct the present skewed market conditions which is the result of a finite number of players.

With regards to derivatives, the committee has recommended that the recommendations of the Expert Group on Foreign Exchange Markets (Chairman: O P Sodhani Committee) be implemented in context of derivatives. However, the committee has forewarned that proper risk management systems be put in place.

The Committee recommends that in Phase II, corporates may be allowed to access overseas markets directly for derivatives without routing such transactions through banks in India. However, the bank should be kept informed of such transactions, said the committee.

The panel has suggested the introduction of currency and interest futures in to facilitate various users to have access to a wide spectrum of cost efficient hedge mechanism. Alongside the introduction of futures, the panel is of the view that it may be worthwhile to institute a system of trading in futures which is more transparent and cost efficient than the existing system of trading in forex markets.

An ideal system of trading in futures would be one which permits greater transparency by displaying on the screen supported by an efficient settlement system.

Phase I

All participants in the spot market to be allowed forward cover.

FIs to get authorised dealers status

Phase II

Corporates to access overseas markets directly for derivatives.

Phase III

Removal of restrictions on participation in spot/forward marekts, in

terms of underlying actual or economic exposures.

NBFCs to function as full fledged authorised dealers

In phase II, the panel has recommended the removal of restrictions on participation in spot/forward markets, in terms of underlying actual or economic exposures