India’s central bank, concerned about the fastest growth in currency derivatives trading in more than three years, is asking overseas funds to prove they are not speculating on the rupee.
Futures and options trading involving the currency rose 47 per cent to a daily average of 387.7 billion rupees ($6.4bn) in June on the National Stock Exchange of India Ltd., the biggest jump since January 2010.
Exchange-rate volatility jumped the most in almost two years during the last quarter as the rupee slid 8.6 per cent, Asia’s worst performance. The spot rate plunged to an unprecedented 61.2125 per dollar on Monday.
The Reserve Bank of India on June 26 asked overseas funds for proof that individual accounts were seeking to limit currency risk on securities by using derivatives.
The central bank has also enquired about foreign lenders’ open positions involving the rupee. Global investors can only use rupee futures and options to protect their holdings of Indian shares and debt.
“There is increased participation from speculators as currency markets are very volatile,” Supreeth S.M., chief executive officer at Quant First Asset Advisors India Ltd. in Bangalore, which manages about $100m in options, said in a July 3 telephone interview. “Companies having external debt payments and those hedging are actively accessing the market.”
RBI spokeswoman Alpana Killawala did not immediately respond to an e-mail sent outside of business hours in Mumbai.
While the central bank has no direct oversight of exchange trading, the authority is concerned the speculative nature of the contracts will lead to a downward spiral in the spot exchange rate, according to J. Moses Harding, who resigned as executive vice president at IndusInd Bank Ltd. in Mumbai last week.
The surge in transactions in exchange-traded currency derivatives is partly due to the central bank’s curbs on trading in forwards and over-the-counter futures, which are under its purview, according to Kanji Pitamber & Co.
The RBI said in May 2012 futures and options positions on exchanges can’t be netted, or offset, by those in the OTC market, following measures in December 2011 that banned rebooking of canceled forward contracts. Forwards are agreements to buy or sell assets at a set price and date.
Lowering the limit on net open positions “cuts market liquidity and makes the rupee more volatile,” Unnati Parekh, head of currency derivatives at Kanji Pitamber, a 78-year-old brokerage, said in a July 2 interview in Mumbai.
“By reducing liquidity in the market you can control, you are just encouraging movement into the non-deliverable forwards market.”
NDFs, which are settled in dollars, evolved for currencies such as India’s rupee and China’s yuan, which aren’t fully convertible. Spot transactions involving the rupee equaled $30bn in 2010, while NDF volumes were more than $40bn, according to a December report from the London School of Economics & Political Science.