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Amidst the euphoria of India's growth story and the fluctuating exchange rate between rupee and dollar, a need has been felt for an effective hedging instrument in the hands of market participants to better hedge their currency-related exposures. Currency futures truly represent such an instrument and are a very good alternative to the existing hedging mechanisms.

 
 
 

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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