In the present integrated business environment, entities irrespective of the nature of their business are impacted by currency risk. Currency futures have been introduced in the Indian markets to enable the businesses to hedge their foreign exchange risks. This article analyzes the current trends of the currency futures segment in India and forecasts its growth.

In the early 1990s, India embarked upon a number of structural changes in the foreign exchange market. Economies were not fully integrated and the rupee was partially convertible. A number of barriers restricted the international finance and trade. As a result of liberalization and globalization a number of changes took place in the international trade. India had a pegged exchange rate regime which was partially floated in March 1992 and then was fully floated in March 1993.

Due to the South East Asian crisis the economies suffered and the pressure on their exchange rates mounted to such an extent that the countries had to float their currencies. At this juncture an important step was taken by the RBI towards current account convertibility which was finally achieved in August 1994. These issues attracted a great deal of interest from policy makers and investors. The RBI has also taken steps towards capital account convertibility, that is, the rupee would be fully convertible on capital grounds. This would increase the scope of international finance and trade and thus foreign exchange market in India. The changes as result of liberalization, privatization and globalization led to the development of the derivatives instruments. The concept of derivatives evolved as a result of the industrial changes, the changing economics of the countries and the changes occurring in the environment. One of the most common risks arising out of the market dynamics is the market risk.

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