Despite massive inflows by foreign portfolio investors into equity markets, trading volumes in currency derivatives on exchanges have declined sharply following the recent Reserve Bank of India order and have shifted to offshore centres, especially Singapore.
The turnover of currency futures on NSE fell 83 per cent to Rs 2,073 crore in July from Rs 12,079 crore in April. Similarly, the turnover of options fell 98 per cent to Rs 2,018 crore in the same period from Rs 1.54 lakh crore on NSE. Turnover on BSE and Metropolitan Stock Exchange of India also declined.
According to the Sebi annual report, the total turnover of all exchanges in the currency derivatives segment is expected to decline by 15 per cent to Rs 377.4 lakh crore in FY24 from Rs 445.9 lakh crore in FY23.
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According to a Sebi report, in the last fiscal, the share of proprietary trading was 66 per cent on NSE, and as high as 90 per cent and 10 per cent on BSE and MSEI, respectively, while FPI share was 9 per cent, 3 per cent and 6 per cent on the three exchanges.
In January, the banking regulator made it mandatory for investors to have valid unsecured underlying contract exposure to trade in the exchange traded currency derivatives market.
In 2014, FPIs were allowed to trade in exchange-traded currency derivatives with a limit of $100 million, without the need to establish “underlying exposure” to equities, bonds, mutual funds or other acceptable financial instruments.
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Offshore Variations
However, most FPIs have shifted their rupee business to the overseas market following the RBI directive. Open interest in rupee/dollar futures on the Singapore Exchange has nearly quadrupled since the beginning of this year to 2.68 lakh contracts, worth over $6 billion. The average open interest in 2023 was 92,000 contracts.
Narinder Wadhwa, managing director at SKI Capital, said the new RBI regulation has led to a reduction in speculative and arbitrage activities, as many traders found the new compliance requirements cumbersome.
He said some market participants have shifted their trading activities to offshore markets such as Dubai and Singapore because there are fewer restrictions there.
Jatin Trivedi, VP Research Analyst at LKP Securities, said the RBI weeded out speculators from the market by allowing positions in currency derivatives only for hedging purposes. He said the measure was aimed at preventing rapid rupee depreciation caused by speculators’ positions and due to strict norms, market participants reduced their participation in currency derivatives.
