Foreign institutional investors (FIIs) may not have to depend heavily on the non-deliverable forward market to hedge their currency risk. Soon, the rupee-dollar contracts will be traded in the US on the Intercontinental Exchange (ICE) and the Globex platform of the Chicago Mercantile Exchange (CME) Group. Market experts say this will be a new threat for India's rupee-dollar markets as currency volumes may shift offshore.
A non-deliverable forward (NDF) is a cash-settled, short-term forward contract on a thinly traded or non-convertible foreign currency.
Both ICE and CME will start trading in the rupee from January 22 and January 28, respectively. CME offers 56 futures and 31 options contacts, reflecting an average daily notional value of $110 billion (around Rs 6 lakh crore) in 2012 and provides over the counter (OTC) clearing for 12 NDF currency pairs.
Both ICE and CME are the world's top exchanges and experts say rupee trading in the US will add up to a substantial change in the outlook for the currency as an internationally traded currency. But pick-up in volumes there would mean accelerating the decline of the onshore market as the rupee would be traded in different time zones.
On CME, standard-sized contracts will have a Rs 50 lakh notional amount, alongside an e-mini contract with a notional amount of Rs 10 lakh. Both contracts will trade on the CME Globex platform and will be cash-settled at expiry.
Currency expert A V Rajwade, however, believes trading of the rupee in the US may not have a significant impact on the onshore market. "Even the NDF market is several times bigger, but it has not impacted onshore trading volumes in the rupee and neither the rates. So it would be too early to say trading rupee on two US exchanges will hit volumes in the segment in India," said Rajwade.
While the Dubai Gold and Commodity Exchange (DGCX) is the only bourse outside India where Indian currency is traded, there is an unregulated NDF market for it in Singapore. Hong Kong and London are other NDF centres, but Singapore is most active, where roughly $50 billion worth of average daily turnover is reported in dollar-rupee contracts.
In April 2011, NDF volumes, at nearly $43 billion a day, were more than double those of the onshore OTC market (about $21 billion a day), and nearly 40 per cent higher than the combined OTC and futures onshore volume.
The NDF market got a further boost after Singapore Stock Exchange (SGX) decided to take care of the counter-party risk or clearing and settlement for NDF.
The overall Indian rupee market is around $25.5 billion a day, registering a growth of 42 per cent during the past two years. Apart from the OTC trades, exchange-traded currency turnover (both NSE and MCX-SX) stands at around Rs 40,000 core.
In Dubai, the Indian currency contracts account for 60 per cent of the total trading volumes on DGCX and 90 per cent of the overall currency futures segment.