Bonds, Currencies & Commodities
Currency derivatives volumes may outstrip equity markets soon

Average daily trading volumes in the Indian currency market have shown a significant jump; they may eventually outgrow volumes in equity derivatives

A dramatic shift is currently underway in the financial market scene in India. The currency futures segment, which was only introduced two years ago, is rapidly catching up with the stock futures segment in Indian stock exchanges.

This is being played out even as the two fiercest rivals in this segment, the National Stock Exchange (NSE) and the MCX-SX, have been going hammer and tongs at each other in a bid to corner a larger share of the currency derivatives pie.

After the Reserve Bank of India (RBI) permitted trading in the currency derivatives segment through the exchanges in India, the average daily trading volumes in the Indian currency market (only exchange traded currency derivatives and excluding the OTC market operated only by the banks in India) have been constantly growing.

Over the past three months alone, average daily volumes in currency futures have surged 37% on both MCX-SX and NSE. Comparatively, the equity derivatives segment has been stagnant for the past few months. Volumes on the NSE have risen marginally (5.4%) since January this year. In fact, the NSE has witnessed a slight decline in average daily turnover from Rs78,437 crore in the month of January to Rs74,674 crore in the month of March. Considering both cash and derivatives segment, the average daily turnover touched Rs88,304 crore in March. Already, the daily traded volumes on the currency derivatives space have touched Rs35,000 crore.

Pramit Brahmbhatt, CEO, Alpari India, a provider of online forex services, said, “The way (the) currency market is growing, it won’t be surprising if it overtakes the equity market in India by 2012. In the days to come, trading in currencies will dominate commodities and equities in India also, as is the case in major developed economies abroad. It was just about a year-and-a-half when trading in currency futures of Dollar-INR was started and on the last trading day of February 2010, the daily turnover of exchange traded currency derivatives was more than Rs36,000 crore, and even exceeded the daily turnover of the commodity market.”

As far as the exchange-traded currency derivatives market is concerned, there was a 30% jump in trading in less than a month’s time after introduction of three new currency futures. The launch of contracts in the new currency pairs of euro-rupee, pound-rupee and yen-rupee in February have contributed to the growth of this segment.

With the RBI announcing its intention to introduce plain vanilla options in the dollar-rupee pair, currency derivatives will get a further boost as it becomes more popular as an investment alternative.

Interestingly, the MCX-SX has recently overtaken NSE as the largest player in this prestigious business segment, despite being allowed to enter the field much later. MCX-SX's market share has averaged 56% since February, outshining its much larger and more resourceful rival by a sound margin. For the last three months, while NSE has managed average daily volumes of 33,03,908, the MCX-SX has shone brightly with volumes touching 38,58,460 in the same period. Prior to February, both exchanges were almost at par with each other. Obviously, MCX-SX’s success has not gone down too well with the NSE, which has a monopoly position in the equity derivatives segment. Not one to take things lying down, the NSE waived the transaction fee on currency derivatives. This waiver meant that MCX-SX could also not charge the fee from its members. Incensed, the MCX-SX filed a complaint with the Competition Commission of India (CCI), which ordered an investigation into the alleged misuse of dominant position by NSE.



Shatilal Hajeri

7 years ago

Any thing new, people are always fascinated. I am afraid many traders willburn thier fingures in such deals.

There is a need to educate the investors about the risks involved in such trades.


7 years ago

very good article

Will United Stock Exchange gain currency?

The United Stock Exchange hopes to hit the ground running with its currency futures offering. It would be an uphill battle against two established rivals, MCX and NSE, especially since NSE has made a predatory move in making membership free

Newly established stock exchange, the United Stock Exchange (USE) has received final regulatory approval to commence operations in currency futures. Following this nod from the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange (BSE), a 15% major shareholder in the USE, has officially suspended its operations in the currency derivatives segment.

While USE has set its sights on the skies, it would do well to be a little circumspect. After all, BSE’s past attempts at floating various derivatives products have turned sour. It has lost out to its rivals, the MCX Stock Exchange (MCX-SX) and the National Stock Exchange (NSE). NSE in particular wants to extend its monopoly over the equity segment to currency as well. It has already made a predatory move, typical of its aggressive mindset, by making membership to its currency derivatives segment free. MCX-SX has appealed to the Competition Commission about this anti-competitive practice. The commission has ordered an investigation. It is quite a messy skirmish USE is entering into.

BSE launched the first exchange-traded Index Derivative Contract on 9 June 2000. Ever since, it has struggled to attract participants, affecting the liquidity on its derivatives platform.

Last year, in an attempt to capture volumes from NSE’s vastly superior derivatives segment, BSE slashed transaction costs for its equity futures and options (F&O) segment. It hoped that the revised fee structures would substantially lower transaction costs for all market participants and improve depth and liquidity in its equity derivatives segment.

In such a scenario, USE will have to usher in some significant changes and innovations in order to attract bigger volumes and liquidity for its currency derivatives product. However, the USE remains quite optimistic about rolling out its currency derivatives offering to the market. It has been on a vigorous membership drive, with over 150 members said to have already submitted their applications. It is expected that most of the members of BSE will join USE in its new venture. The exchange also claims to have garnered keen interest from new members from the banking and broking fraternity.

According to T S Narayanasami, MD & CEO of USE, “USE’s membership drive is in full swing and we are very pleased to see spontaneous response from the banks which are natural partners of USE apart from (the) broking community. Trading membership is initially free with nil transaction charges to begin with. It is envisaged that since almost the entire banking system is a stakeholder, USE will gain significantly by the volumes traded by them on the exchange. USE has tentatively planned to commence operations in June 2010.”

Madhu Kannan, MD and CEO of the BSE added, “The currency derivatives market in India has enormous potential for continued growth in the next few years. We expect USE to compete well in this growing market on the basis of product innovation, the training & development of new participants, and strong leadership.”

The USE has attracted equity investments by both PSUs and the private sector. USE represents the commitment of all 21 Indian public sector banks, some reputed private banks and corporate houses.


Are bond markets sceptical of FM’s borrowing plans?

Bond Street seems to have taken the FM’s fiscal consolidation plans with a pinch of salt as bond yields have since surged past 8%, perhaps due to the government’s borrowing programme

In his Budget speech, finance minister Pranab Mukherjee had outlined a clear path for the government to pull back from its heavy borrowing position. He had proposed to bring down the fiscal deficit to 5.5% of gross domestic product (GDP) by the end of the next fiscal year from the current 6.8%. This came as a relief to many economists as continued borrowings would have threatened to put inflation out of control. The bond markets, though, have apparently not yet taken the minister’s word on this matter.

Since the finance minister’s Budget day speech, bond yields have risen rapidly to cross the 8% mark, for the first time since October 2008. Yield on the 10-year government bond jumped to 8.01% in a matter of weeks. Bond prices have plunged, as investors are shying away from putting in more money in government paper. What is causing the bond market to be so cautious?

Apparently, investors on Bond Street are still fearful that interest rates are likely to pushed up on account of the high borrowing by the Central government. Despite all the talks about fiscal consolidation, investors are sceptical whether the government can actually deliver on its promises.

Axis Bank’ treasury head RVS Sridhar believes that yields are moving up because of the tighter liquidity conditions expected on the back of high government borrowings. “The Union Budget has projected high net borrowing of about Rs3.45 lakh crore in FY11. Given tighter liquidity conditions that are expected, such a high borrowing is expected to be detrimental to low yields. Bond markets have reason to be cautious about the high borrowings as liquidity conditions are unlikely to be favourable. The Reserve Bank of India (RBI) would need to step in with a suitable strategy to address the caution,” he said.

Inflation is an unavoidable corollary of the government’s borrowing binge.  Wholesale price-based inflation rose to 9.89% in February from 8.56% in the previous month due to increase in prices of certain food items such as sugar and the hike in excise duty on fuel announced last month.

Mr Sridhar said, “Inflation remains the major concern, given that high inflation, seen currently, could invite tough action from the RBI in the form of tightening, and push up yields. However, the market view suggests that inflation may ease to about 6% by about June or July 2010 and may provide comfort at that stage.”
In the face of this surge in bond yields, banks are now staring at huge losses on their income statement. It is customary for banks to provide for marked-to-market losses, as per RBI’s guidelines. This is where bank treasuries will feel the pinch. {break}

Mr Sridhar believes that banks that may have excess statutory liquidity ratio (SLR) holdings are likely to face pressure due to rise in yields. “However, banks that have been hedging or those which have a nimble strategy could reduce the impact significantly. Also, banks would stand to gain on account of higher yields on their investments. Surely, that would be insufficient to take care of investment losses”, he added.

The markets are now bracing for some action by the RBI in its April monetary policy. Faced with mounting worries about inflation, it is expected to take a hard stand on the matter. It had hiked the cash reserve ratio (CRR) by 75 basis points to 5.75% in its December monetary policy review.

This time, the RBI is likely to raise the repo and reverse repo rates a couple of notches to reign in the excess liquidity in the system. Mr Sridhar is of the opinion that the RBI could hike CRR by about 25-50 basis points in its April policy, while hiking the reverse repo and the repo rates by 25 basis points each.

Rohini Malkani, economist, Citi India said, "Given the growing influence of structural factors, the WPI could likely remain in high single digits rather than the preferred range of approximately 5%. This in turn could potentially keep the rate structure higher. We expect the RBI to raise policy rates by a minimum of 125bps in 2010 with a first hike in its policy on 20th April.”

Echoing the same views, Tushar Poddar, vice president and chief economist, Goldman Sachs (India) said, "(Due to) elevated food and fuel inflation, and signs of them spilling over into core (sectors), long transmission lags in policy, risks of rising inflationary expectations, and excess liquidity feeding through to asset and general prices, we continue to expect the RBI to begin withdrawing liquidity through the CRR of banks and to hike rates by 50 bps by the 20th April policy meeting. The probability of a rate hike before the policy meeting has increased. Cumulatively, we continue to expect the RBI to hike effective policy rates by an above-consensus 300 bps in 2010, 150 bps by raising repo and reverse rates, and 150 bps by tightening liquidity."



shibaji dash

8 years ago

Any one can say why Finance Bill 2010 proposes to reintroduce the permanent amnesty to tax evaders caught in search and seizure cases by undoing the corrective amendment that was inserted by the Finance Act 2007 in Section 245C/H etc of Chapter XIX A of the Incometax Act, even if the amnesty provisions split in the past and now will again split the Incometax Organisation right in the middle in to two incompatible segments?

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