In recent times, the rupee's phenomenal rise against dollar
has significantly boosted the demand for rupee-denominated
debt instruments in offshore markets. It's a fact that rupee's
rise has sent positive signals across the world about the
growing strength of the Indian economy as well as its underlying
currency. While a stronger rupee helped Indian importers,
it began to affect the exporters' earnings. If the country
has to sustain its growth momentum in the long-run, an effective
hedging mechanism which would enable them to cope better
against their currency-related exposures is necessary. This
has lent urgency to the demand for commencing a domestic
currency futures market wherein India's trade partners can
effectively hedge the foreign exchange (forex) risks that
they frequently encounter. The Indian rupee has risen by
about 13% against the dollar in less than a year from about
15% last July. However, it has been under pressure against
the dollar recently and has taken a beating against the
greenback.
A currency future is a futures contract where investors
buy or sell one currency against another at a specified
predetermined price and date in future. Exchange traded
currency futures will work similar to Future and Options
(F&O) in stock on recognized exchanges with the basic
difference that the underlying instrument traded will be
various currencies of the world. International Monetary
Market (IMM), a division of Chicago Mercantile Exchange
(CME) initiated the concept of currency futures in 1972.
The commencement of a non-deliverable rupee-dollar futures
contract in the Dubai Gold and Commodities Exchange (DGCEX)
in June 2007 has underlined the pressing need to kick start
a similar facility in India. DGCEX was looking at tapping
India's burgeoning foreign trade, especially with India's
third largest trading partner, the United Arab Emirates.
However, this is not the end and there is more to it. What
made Indian policymakers uncomfortable was the issue that
rupee was being officially traded over a foreign exchange
and not in Indian exchanges. Interestingly, the launch of
rupee futures by DGCEX evoked debates in India about the
possibility of allowing a similar facility in India. Shahab
Jalinoos, Currency Strategist at ABN Amro in Singapore,
opines, "The more such kinds of products exist outside
India, the more anomalous it seems that India does not have
any such kind of product." As a consequence, last year
the RBI formed an internal committee to explore the prospects
of launching trading in currency futures in India. By announcing
guidelines on currency futures recently, the RBI has paved
the way for exchange-traded currency futures in the country.
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