Volumes in the currency derivatives space are up almost 80% compared to that during the start of the financial year. The average daily volume so far this month for all exchanges combined stood at Rs 32,611 crore compared to Rs 17,012 crore in April 2014. The open interest too has increased four-fold during this period.
Market players attribute lifting of trading curbs and stability in the currency as the reasons for the gradual up tick in volumes seen during 2014-15.
“We have seen a huge build-up of option positions. Regular trading interest in the currency derivatives has improved because of the expansion in the positional limits by the RBI. Volatility in the currency market has also been low,” said Kishore Narne, associate director and head (commodity and currency), Motilal Oswal Commodity Broker.
In June 2014, the Reserve Bank of India (RBI) set a limit of $10 million per exchange for foreign portfolio investors (FPIs) allowing them to take positions in the currency derivatives segment up to the limit without any underlying exposure.
Currency derivatives is a typically used a risk-management tool used by corporate and banks to manage their currency exposure.
The hike in limits per exchange means that entities can now take exposure of up to $30 million without furnishing any underlying. This has helped improve the currency exposure management to some extent, industry officials said.
“The currency exposure is certainly better managed now but the hedge ratio has not picked up as much as desired. The corporate should take advantage of the reduced forward premium and put better hedging strategy in place,” said N S Venkatesh, chief financial officer, IDBI Bank.
Further, the low volatility in the Indian rupee against the US dollar has also encouraged traders to opt for different products like currency options because of the attractive pricing.
While the rupee has largely held its ground against the greenback this year even as most other currencies have declined sharply.
Brokerage firms have also been slashing brokerage rates further pushing trading activity. Experts said that the strategy was not adopted by all players, but only by those with a substantial presence in equity and debt trading segment.
“The cost of trading has also been brought down to bring in more trades through the exchange platform. The over-the-counter market is still more popular than the exchange platform at this point,” said Vikas Vaid, product head (commodity and currency), Prabhudas Lilladher.
As per industry estimates, the cost of trading for large traders could be anywhere between Re 1 per lot and Rs 5 per lot. For smaller traders, it could start at Rs 10 per lot and go as high as Rs 30 in some cases, they said.
Brokers believe the volumes could grow another 30% from current levels if further relaxations are provided.
The impediment to this growth could be the cap on the positional limit which the industry has asked to be raised to $15 million going by the rising activity in the industry. Besides, the documentation process for providing underlying exposure needs to be streamlined across the industry by the regulator.
“The documentation process needs to be simplified in order to get higher positional limits. Right now there is no uniformity in documentation because there is no clear format given by the regulator,” said Hemal Doshi, chief currency strategist, Geojit Comtrade.
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