MC Exclusive| Brokerages ask currency derivatives dealers to shift focus to equities, commodities

At least three Mumbai-based brokerages have asked their currency derivatives dealers to shift focus to equities and commodities post the reduction in derivatives volumes due to new RBI norms, four people aware of the development told Moneycontrol on June 17.

“Our company has asked us to focus more on equities and commodities as the volume in currency derivatives is low,” one of the person’s cited above said.

In the last few months, after the implementation of the new RBI (Reserve Bank of India) norms, the open interest  and average turnover of currency derivatives has declined sharply in the market.

According to the National Stock Exchange of India’s (NSE’s) data, the futures open interest stood at 43,22,828 on June 17, compared to 63,71,215 on January 5.

The average daily turnover in the currency derivatives market stood at Rs 4,369.40 crore on June 17, against Rs 26,380.56 crore on January 5.

Also read: Open interest contracts rise in currency derivatives market as corporates ramp up hedging amid rupee volatility

“Most dealers had limited work, hence, companies have asked them to focus on other portfolios,” said a person who did not wish to be named.

On January 5, the RBI had said that investors must have valid underlying contracted exposure that has not been hedged using any other derivative contract, and they should be in a position to establish the same if required.

The underlying in derivatives contracts refers to the order bill, or receipt, in the case of exporters and importers, or documents to support the transaction in case of remittances.

The initial implementation date of the RBI circular was April 5, which was later extended to May 3 after concerns were raised about participation in the exchange-traded currency derivatives market.

Dealers don’t expect volumes to pick up substantially, but some movement can be seen due to volatility in the rupee.

Also read: Will RBI’s new currency derivatives norms wipe out most exchange traded volumes?

As the initial deadline for the implementation of the norms drew near, volumes in the market began tapering off. The quantum of trades dipped even after the RBI extended the deadline.

On April 9, Moneycontrol reported that the currency derivatives open interest on the exchanges fell around 47 percent, with most participants reluctant to take fresh positions and continuing to unwind their existing contracts, according to foreign exchange experts.

Since the launch of currency futures in August 2008, open interest volumes recorded a compounded annual growth rate (CAGR) of about 70 percent till 2013, but began easing off thereafter due to a currency crisis in India, a dealer with a brokerage firm said.

In 2014, the RBI relaxed conditions saying that exposure of up to $10 million did not require documentary evidence of underlying assets, which again boosted volumes in the market.

Over the years, the limit was raised to $100 million. Between 2014 and 2024, before the January 5 circular, currency derivatives volumes grew between 15-40 percent annually.