Rupee future trade shrinks on NSE, partly shifts to Singapore
RBI direction on currency futures is said to be the reason for the trend
Futures trading in the rupee-dollar pair shrunk almost 75 per cent on the National Stock Exchange (NSE) in the last quarter of FY25, compared to the number of contracts a year ago.
The trend persists if we take almost two and a half months of FY26.
Why does this analysis compare the latest figures with the quarter ended March 31, 2024? The reason is simple: experts blame a master direction by the Reserve Bank of India (RBI) for the fall in volume. The new norms, listed in the master direction on currency futures and exchange traded currency options, were issued in January 2024 and implemented on April 5.
In fact, volumes on rupee futures were down almost 36 per cent even during the last quarter of FY24 compared to a year ago (chart 1, click image for interactive link).
The norms said that proprietary and retail traders in this segment must show that they are hedging a currency risk that they have already contracted for or are going to contract for.
In other words, these traders cannot speculate on exchange rate movements using currency derivatives that trade on Indian exchanges, explained Ramabhadran Thirumalai, associate professor of finance (practice) at Indian School of Business.
Derivative markets are where traders trade risk, he said, adding hedgers want to “sell” risk and speculators are the ones who want to “buy”.
"Corporations and banks will use currency derivatives to hedge their exposures, while proprietary and retail traders are the ones who pick up the risk. The RBI direction has prevented one side of the market from participating, which has resulted in future volumes to reduce dramatically."
While it is possible to hedge risk in the currency derivatives segment, it will largely be only between hedgers. However, it will be more difficult to find someone wanting to hedge the opposite side risk.
Corporations and banks use currency derivatives to hedge their exposures, while proprietary and retail traders are the ones who pick up the risk.
Many say that futures trading in the rupee has shifted to the overseas market.
However, volumes on the rupee futures (paired with dollar) was 25 per cent up in the last quarter of FY25 compared to the number of contracts a year ago on the Dubai exchange. The ongoing quarter is set to see much higher volumes since the number of contracts till June 18 was almost the same as those in the entire fourth quarter of FY24 (chart 2).
The Singapore Exchange has witnessed a huge rise in volumes: 74 per cent during the last quarter of FY25 compared to those a year ago. The ongoing quarter is set to see further rise in volumes of these trades (chart 3).
