Average daily turnover in currency derivatives rises to six-month high

Currency Derivatives

The average daily turnover in the currency derivatives market has surged to a six-month high so far in October, according to National Stock Exchange (NSE) data.

As per the NSE data, the average daily turnover stood at Rs 6,528.01 crore so far in October. This was the highest since April, 2024, when it was around Rs 20,645.92 crore.

The volumes in October have picked up due to higher turnover on October 3, October 4, and October 7, the data suggested.

"The activity has increased because of OTC arbitrage. Banks are taking advantage of the difference between the two," said Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP.

However, it remained lower after the new underlying norms by the Reserve Bank of India (RBI) on currency derivatives.

In a circular dated January 5, 2024, the central bank said that investors must ensure the existence of a valid underlying contracted exposure, which has not been hedged using any other derivative contract, and that they should be in a position to establish the same if required.

The volumes in terms of open interest contracts and average daily turnover has been falling since the RBI kicked in new norms in the currency derivatives segment which requires underlying foreign exchange exposure for transacting in exchange-traded rupee derivatives.

While it did not specify a reason, central bank officials said the Foreign Exchange Management Act says that exchange-traded currency derivatives are only for hedging.

The underlying in derivatives contracts refers to the order bill, or receipt, in the case of exporters and importers, or documents to support the transaction in the case of remittances.

The initial implementation date of the RBI circular was April 5, which was extended to May 3 after concerns were raised about participation in the exchange-traded currency derivatives market.

Soon after this, the aggregate open interest currency derivatives contract on the Singapore Exchange rose around 44 percent. On the other hand, back home, volumes fell constantly.

Even after several months, the volumes in the currency derivatives has not stabilised and remained lower. Most volume has been seen by traders having underlying exposure, dealers said.