Money matters

Mumbai, Nov. 16: The Reserve Bank of India today kick-started an initiative to launch currency futures in the country. The central bank floated a consultation paper on the subject that said the instrument could co-exist with the current climate of capital controls.

“The open economy framework requires increased opportunities for economic agents to hedge the currency risks through a wider menu of instruments,” said the report.

Countries such as Mexico, South Korea, South Africa and Brazil — all with some form of capital controls — have introduced currency futures and there was no reason why India shouldn’t do so as well.

The report acknowledged that currency futures had a flipside: first, there was the risk of dollarisation of the economy; second, the risk of increased volatility of the exchange rate which could spill over to other segments of financial markets and impact interest rates, the pace of economic activity, inflation and financial stability.

The report said the central bank should be the single regulator of the currency futures markets.

Initially a standardised product should be introduced across exchanges (in terms of contract size, final settlement dates, settlement procedure and tenors of contracts), which would ensure greater participation and add to the liquidity of the futures markets.

It suggested that a single contract with a notional value of $1000 could be introduced. Initially, currency futures maturing in the first 12 calendar months may be offered.

The report said settlement should be only on cash basis based on the spot RBI reference rate on the relevant expiry date. It also suggested that the methodology for fixing the reference rate may be revisited.

The paper proposed that the contract may be allowed to expire on the first working day after the 15th of every month.

It recommended that membership should be of two types — hedgers and speculators. The responsibility for fixing the margins for these categories could be left to the exchanges.

There should be no quantitative curbs imposed on residents who wish to trade in currency futures. It wanted participation restricted to only residents in the initial stage.