MUMBAI (Reuters) - Indian currency futures volumes have been stifled by the RBI move last year to prevent rupee weakness which has indirectly created prices variations between listed and over-the-counter derivatives, a senior official at domestic exchange MCX-SX told Reuters.
The MCX-SX exchange launched in 2008 is a new entrant in the Indian currency and equities market which, in addition to a suite of currency futures and options, also offers trading in Indian stock spot and futures and options since February 2013.
MCX-SX logs about $3.5 billion in daily volume on average in options and futures, less than half of a nascent 4-year old market totalling about $8 billion. Although volumes spurt in times of volatility, growth has stagnated over the last year with volumes having peaked at more than $12 billion a day.
That is owing to the central bank's rules which limit the positions investors can take in futures and also raise doubts about the credibility of prices quoted, said Sanjit Prasad, Director Business Development at MCX-SX.
"The measures have had a very negative impact on the currency futures market," he said at an FX summit held at the Reuters office in Mumbai.
The Reserve Bank of India in May last year said rupee open position limits for Indian banks shall not include positions taken in the currency futures and options segment and barred banks from netting or offsetting their positions in the futures against the forwards or vice-versa.
The RBI also set position limits for banks for trading currency futures and options at $100 million or 15 percent of the outstanding open interest, whichever was lower.
"This measure has disengaged the futures and forwards market," Prasad said.
"So for one asset you have two different prices.
"Hedgers have started questioning the sanctity of the price in the futures market and that has played a big role in checking our growth in terms of volumes and open interest," he said.
Corporates who have long used the over-the-counter market offered by banks trust the price quoted by banks more than the one they see on the exchange and the huge difference is only worsening the situation.
The one-month futures contract on the MCX-SX currently trades at 54.39 per dollar while the 1-month forward in the over-the-counter trades at 54.49, clearly highlighting the price gap.
"The moment the RBI allows netting off positions between the two markets, the gap will disappear as banks step in to arbitrage this gap. It will wipe out the inefficiencies of the market," Prasad said.
The recent sharp moves in gold and crude prices have also bought into focus inefficiencies in the hedging facilities.
The currency futures market in India is open from 9 a.m. local time (0330 GMT) to 5 p.m. whereas commodities markets are most volatile after 5 p.m. when U.S. markets open.
"Unfortunately we don't have a platform after 5 p.m. Most of the orders that come in for small importers and exporters, come in after 5 p.m. We have the MCX to hedge the commodity risk but you have to wait for the next day morning to hedge the currency risk," Prasad said.
This has been particularly critical in recent weeks when clients had to grapple with huge volatility in global markets.
The absence of a market after 5 p.m. is also one of the reasons leading to a spurt in other offshore exchanges offering the USD/INR contracts on their platforms.
Global exchanges such as the Chicago Mercantile Exchange, the Intercontinental Exchange and the Dubai Gold and Commodities Exchange (DGCE) are now offering currency futures contracts in the USD/INR pair with the DGCE seeing volumes close to $4 billion on days of high volatility.
"These trading places are coming up with USD/INR contracts because we do not have extended market hours here. There is a dire requirement from our small and medium enterprises to hedge their currency risk. You cannot try to strangulate the market, the market will move out," Prasad said.
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Additional Reporting by Subhadip Sircar, Tony Munroe, Suvashree Dey Choudhury and Siddesh Mayenkar; Editing by Jacqueline Wong