RBI releases draft on currency futures

New Delhi, Nov 16 (UNI) The Reserve Bank of India (RBI) today released a draft paper for introduction of currency futures in the country that will enable wider hedging opportunities and strengthen economic agents' ability to cope with market-induced currency movements.

The RBI in its draft said it will allow futures contract between Dollar and the Rupee.

Participants wishing to hedge specific currency exposures other than Dollar-Rupee may consider approaching forwards market for it. Introduction of other currency pairs could be considered at a later stage, said the RBI.

''Introducing only Dollar-Rupee pair would mean that liquidity is retained within one contract,'' it said.

The RBI added that in the initial phase, a standardised product across various exchanges (in terms of contract size, final settlement dates, settlement procedure of contracts, tenors of contracts) would enable greater participation and add to the liquidity of futures markets. The apex bank feels this would also discourage situations of unhealthy competition among the exchanges.

The RBI has capped the size of the contract to a single contract being of 1,000 dollars initially.

The central bank said the rationale behind such contract size is that if the price discovery through the futures contract is done for a large size lot, the individuals and SMEs may not be able to capture the fineness of that rate for their small-sized lots.

''Hence, it is important that the contract size be kept at such a level that it facilitates price discovery as well as trading, particularly for retail segment of the market,'' said the RBI.

However, the apex bank adds that the retail focus of the contract should not in any manner disenchant the institutional clients since in the era of electronic trading, the cost efficiency is not compromised at all even if multiple contracts have to be purchased. A single contract would also ensure that market frictions are avoided, which could occur in case of multiple contracts, the RBI added.

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