RBI Moves To Deepen Exchange Traded Currency Derivatives Market

The Reserve Bank of India has allowed domestic and foreign investors to take larger positions in the exchange traded currency derivatives segment. The central bank had, at the time of the monetary policy announcement on February 8, said that it intends to raise position limits and a notification has been issued to this effect on Monday.

The RBI said that domestic participants and foreign portfolio investors can now take a cumulative position of upto $100 million across all cross-currency derivative pairs, without underlying exposure. This includes the Dollar-Rupee, Euro-Rupee, Pound-Rupee and Yen-Rupee pairs.

Until now, market participants were allowed to take positions (long or short) upto a limit of $15 million in the Dollar-Rupee pair without underlying exposure. In the case of other cross currency pairs, the combined limit was set at $5 million. This has now been reviewed and a combined limit of $100 million has been set.

The limits must be monitored by the exchanges and any breach of the limit must be reported to the RBI, said the central bank.

The RBI has so far maintained a tight hold on the currency derivatives market. During the 2012-13 period when the Indian currency was under pressure, the RBI had imposed restrictions on this segment to stem speculation. As a result, volumes in the exchange traded currency segment have moved to foreign exchanges like Singapore’s SGX and Dubai’s DGCX.

The current limits were too tight, said Samir Lodha, managing director at QuantArt Market Solutions, a risk management firm. He added that the widening of limits should help bring some volumes back to domestic exchanges.