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Indian rupee exchange derivative volumes to plummet on cenbank's hedging rule, brokers say

Tuesday,   02-Apr-2024   09:42 AM (IST)

The Indian central bank's regulation saying exchange-traded rupee derivative transactions can be undertaken only for hedging purposes will cause volumes to fall more than 80%, effectively dealing a fatal blow to this segment, four brokers said. The Reserve Bank of India (RBI) had said in January that effective April 5, exchanges may offer forex derivative contracts involving the rupee to users "for the purpose of hedging contracted exposure". The central bank had previously allowed users to take positions of up to $100 million without having to establish the existence of any underlying exposure. The RBI's hedging rule was reiterated by exchanges on Monday, signalling the central bank has not changed its mind despite concerns raised by brokers about its impact on volumes. They had said that proprietary traders and individual investors, who were the main contributors to rupee derivative volumes, will not meet the underlying exposure requirement and will no longer be able to participate. The brokers did not want to be identified because they have been directed by the compliance department to not talk to the media. The RBI did not immediately reply to Reuters' request for comment. Volumes could fall 80%-85%, an analyst at a large Mumbai-based broker said. Meanwhile, an official at a different brokerage expects a bigger decline, noting that only about 10%-12% of their volumes was by clients - largely corporate and foreign portfolio investors - who would be able to meet the hedging specification. Proprietary books and retail investors were responsible for the remaining, the official said. According to a recent publication by NSE, India's leading exchange for currency derivatives, proprietary traders and individual investors accounted for 80% of the turnover in currency derivatives based on notional turnover in February. "These were the market markers and the liquidity providers. With them out, who will provide prices to the hedgers?," the official said. The hedgers, on account of poor liquidity, too will withdraw from the market and volumes will drop to "next to nothing", he said. The official further noted that hedging activity for foreign investors might shift to the local over-the-counter and non-deliverable forward markets. A third broker mentioned that their clients would only be permitted to square off positions for now, following guidance from exchanges.