Average daily turnover for currency futures and options, including notional turnover for currency options, on the country’s largest stock exchange was at ₹20,646.06 crore in April, registering a decline of 87% from ₹1.56 lakh crore in March, exchange data showed.
From April 2022 to March 2024, the average daily turnover for each month was at ₹1.51 lakh crore in the exchange-traded currency derivative (ETCD) market, largely driven by retail players and transactions through proprietary trading desks of financial institutions such as brokerages.
Given that such players had hitherto entered the market to bet on the rupee’s future movements against other currencies – and not for hedging underlying exposure – analysts see the decline in volumes as a shift to a new normal.
“The requirement of underlying exposure for trading in ETCDs has pushed many participants to move to other asset classes like equities and commodities,” said Dilip Parmar, head of research at HDFC Securities. “The impact on the two biggest contributors – proprietary and retail – has left the exchange-traded currency derivative markets dry,” he said.The Reserve Bank of India (RBI) clarified on April 4 that its regulatory position was that while trades up to $100 million could be done without having to provide documentary evidence of underlying exposure, there was no exemption from the requirement of having such exposure.The central bank had extended the compliance deadline from April 5 to May 3 after a scramble from retail players to unwind positions due to uncertainty over the need to prove valid underlying contracted exposure.Only about 10% of volumes in ETCDs came from players such as foreign portfolio investors with actual underlying exposures, which could be furnished upon request, analysts said.
The sharp drop in volumes in ETCDs coincided with a phase where a series of unfavourable global developments contributed to an increase in volatility in the dollar-rupee exchange rate, which had otherwise stood out for being one of the calmest currency pairs over the past year.
“What generally happens is that as liquidity declines in the currency market, especially in the options market, you could hypothetically see a situation where global events cause a rise in volatility. This is because you don’t see many options sellers,” said Anindya Banerjee, head of research – currency and commodity derivatives at Kotak Securities.