The introduction of currency futures in India in August last year was an important milestone in the history of the country's financial system. The volumes of these contracts on the exchanges have been increasing over the last few months as more and more investors are opting for this platform to hedge their currency risk.

India joined the currency derivatives game, with an impressive start as the country's first ever Exchange-Traded Currency Futures (ETCF) got off the mark, as active involvement from companies, brokers and retail investors ensured more than expected volumes. The National Stock Exchange (NSE) became the first exchange that launched ETCF in the country. Primarily, the Reserve Bank of India (RBI) allowed trading contracts to be denominated in the US dollar and the Indian rupee, the size of the contract was set at $1,000 and with a maturity period of 12 months. The settlements and quotes would be made only in rupees, as per central bank specifications. The transparency in the ETCF market in India could develop into a hub for currency futures trading and make it the financial center in Asia for all financial instruments, over a period of time.

Basically, Over-The-Counter (OTC) forward market occupies a majority stake in currency markets all over the world. Same is the case with India. When the OTC market segments are performing well, does India need Currency Futures? Indeed, banks are playing an active role in OTC markets, and a lot of retail market segments are still left untouched. To minimize the monopoly of banks in the currency market and encourage institutional investors, like Small and Medium Enterprises (SMEs) and the individual investors, the ETCF are much needed.

A vigilant central bank had kept the rules on the contract tight to avoid a rush of offshore speculators that could disrupt the market. In the meantime, the new currency futures contracts have begun to address the needs of a growing class of small and midsize companies in India, as well as individuals, who want to hedge their coverage to the dollar-rupee exchange rate. Hemant Mishra, Managing Director and Regional Head of Corporate Sales for South Asia, Standard Chartered Bank, opines, "It is about creating an incremental liquidity pool, and I don't see a surge in volumes initially. I see a gradual increase; the contract would help boost average daily volumes in the spot foreign exchange market to $10 bn or more from $4 bn to $5 bn now." The RBI's parameters on the new currency contracts may mean that volume remain low until the central bank is comfortable enough to relax the rules.

So, being familiar with futures and options and with more and more financial products being made available, Indian investors can choose the best ones to trade in. Apart from the OTC segment, banks are going to play a key role in the currency futures also. ICICI Bank, which has large customers of SMEs, is among the most active of the 11 banks in the market. All these factors will help the currency futures market to reinforce and stay alive. No physical exchange of currency, strict risk management and disclosure criteria are expected to vigor the system in currency markets further. In the long run the opportunities in the currency futures could play a major role in the Indian financial market.

Treasury Management Magazine, Currency Futures, National Stock Exchange, NSE, Small and Medium Enterprises, SMEs, Financial Instruments, Currency Market, Risk Management, Financial Markets, Securities Transaction Tax, Foreign Institutional Investors, FIIs, Exchange-Traded Currency Futures, ETCF.