In every segment of the securities markets, the first question that comes up when a new product is introduced is trading by foreign institutional investors. In view of the FIIs playing a major role in the market development of the domestic stock markets, it is natural to expect the entry of foreign institutional investors in the trading of currency futures which is currently offered by MCX-SX, NSE and BSE.
Overcoming the initial reservations of critics, volumes in currency futures are showing gradual growth. While it took four years for the stock index futures to cross the Rs1000 crore average daily turnover mark, the trading in currency futures accomplished it in less than two months much to the surprise of even the market proponents. Average daily turnover in MCX-SX and NSE together are showing continous rise reaching to a level of Rs. 2000 crores (single side) since the trading in currency futures began about four months ago.
In view of the promising performance of this segment as also greater prospects for its growth in the future, analysts normally expect that the participation of FIIs in currency futures trading will lead to further rise in volumes and improvement in market depth.
Back at the capital markets, most of the analysts attribute the fall of the sensex from 21,000 to 9,000 levels to the flight of the FII investments and the failure of the market to develop equally effective domestic players or innovative products which can challenge the downward momentum to have the downfall stopped at a reasonable level. An analysis of the stock market movement in response to the current crisis indicates that the downfall level in India measured in terms of Sensex momentum is the highest in India among the emerging BRICS nations.
While the argument for allowing FIIs in currency futures trading principal appears to be attractive, if the lessons from the stock markets were to be applied it would call for time to wait and further development of the market. There are equally sound arguments in favour of taking some more time before the FIIs are allowed to trade in currency futures.
a. Allowing FIIs in currency futures will take the country closer to free convertibility of the currency. That being our genuine aspiration, the issue is about the timing. In the back of so much of uncertainty on global economic prospects and the pressure building on the emerging economies, will it be the right time to move in this direction at this juncture particularly when the currencies of several emerging markets in themselves are experiencing intense volatility.
b. It is important that in such an important segment such as currency futures, the strength of the domestic players should be enough to show the real strength of our economy. FIIs with opportunity for trading in domestic and global exchanges where as the domestic market intermediaries have access only to local markets thus pose the problem of unequal level playing field. On the other hand, FIIs with larger stake, reach and access to global exchanges have the potential to sway the market in particular directions more suitable to them than to be of any relevance to the real economy. Thus, it is important that some space be given for the domestic players to understand the market and grasp it with more confidence before we allow the floor for FIIs.
c. Lessons from domestic stock markets indicate that FII participation has the potential to make this segment more speculative and volatile. Rupee being the currency of a major economy such as India, contrarian views on its current strength and position could lead to wide swings in currency rates affecting trade balance. With FIIs participation picking up greater momentum without the development of the domestic market in an asset class like rupee would make markets sway more the global speculation with little weight to domestic fundamentals and make the economy vulnerable to such global financial meltdowns as the recent one.
d. In this background it would be desirable if the currency futures segment is made to attract more of domestic players in the short term, say in the next two to three years and the markets are given access to more products such as cross or straight currency derivatives to enable them bring in diversified risks denoting each of the currency areas. A simple dipstick to check the preparedness of the currency markets to face the FII segment would be the percent of the derivatve volume to the total of the OTC volumes.
For example, derivative reach to half of the OTC volumes would crudely indicate that the markets are in a state to welcome FIIs as it is with the current OTC volumes. To develop volumes to half the level of OTC, it would need role out of a road map essentially focussed on the domestic players.
In this regard, it becomes imperative for the government, regulation and exchanges to take larger responsibility in creating awareness, conducting training and education, strengthening skill sets and certification in currency futures. Exchanges such as MCX-SX are already active through various possible media in this regard.
In the globalizing economy, it is essential that this market with wider implication for connecting the domestic stakeholders with the global markets should be strengthened to withstand global effects which would be passed on through FII participation. A strong and resilient domestic market can always act as the shock absorber for the entire economy at times of financial crisis as like the one now and make the globalization process seamless.
Overcoming the initial reservations of critics, volumes in currency futures are showing gradual growth. While it took four years for the stock index futures to cross the Rs1000 crore average daily turnover mark, the trading in currency futures accomplished it in less than two months much to the surprise of even the market proponents. Average daily turnover in MCX-SX and NSE together are showing continous rise reaching to a level of Rs. 2000 crores (single side) since the trading in currency futures began about four months ago.
In view of the promising performance of this segment as also greater prospects for its growth in the future, analysts normally expect that the participation of FIIs in currency futures trading will lead to further rise in volumes and improvement in market depth.
Back at the capital markets, most of the analysts attribute the fall of the sensex from 21,000 to 9,000 levels to the flight of the FII investments and the failure of the market to develop equally effective domestic players or innovative products which can challenge the downward momentum to have the downfall stopped at a reasonable level. An analysis of the stock market movement in response to the current crisis indicates that the downfall level in India measured in terms of Sensex momentum is the highest in India among the emerging BRICS nations.
While the argument for allowing FIIs in currency futures trading principal appears to be attractive, if the lessons from the stock markets were to be applied it would call for time to wait and further development of the market. There are equally sound arguments in favour of taking some more time before the FIIs are allowed to trade in currency futures.
a. Allowing FIIs in currency futures will take the country closer to free convertibility of the currency. That being our genuine aspiration, the issue is about the timing. In the back of so much of uncertainty on global economic prospects and the pressure building on the emerging economies, will it be the right time to move in this direction at this juncture particularly when the currencies of several emerging markets in themselves are experiencing intense volatility.
b. It is important that in such an important segment such as currency futures, the strength of the domestic players should be enough to show the real strength of our economy. FIIs with opportunity for trading in domestic and global exchanges where as the domestic market intermediaries have access only to local markets thus pose the problem of unequal level playing field. On the other hand, FIIs with larger stake, reach and access to global exchanges have the potential to sway the market in particular directions more suitable to them than to be of any relevance to the real economy. Thus, it is important that some space be given for the domestic players to understand the market and grasp it with more confidence before we allow the floor for FIIs.
c. Lessons from domestic stock markets indicate that FII participation has the potential to make this segment more speculative and volatile. Rupee being the currency of a major economy such as India, contrarian views on its current strength and position could lead to wide swings in currency rates affecting trade balance. With FIIs participation picking up greater momentum without the development of the domestic market in an asset class like rupee would make markets sway more the global speculation with little weight to domestic fundamentals and make the economy vulnerable to such global financial meltdowns as the recent one.
d. In this background it would be desirable if the currency futures segment is made to attract more of domestic players in the short term, say in the next two to three years and the markets are given access to more products such as cross or straight currency derivatives to enable them bring in diversified risks denoting each of the currency areas. A simple dipstick to check the preparedness of the currency markets to face the FII segment would be the percent of the derivatve volume to the total of the OTC volumes.
For example, derivative reach to half of the OTC volumes would crudely indicate that the markets are in a state to welcome FIIs as it is with the current OTC volumes. To develop volumes to half the level of OTC, it would need role out of a road map essentially focussed on the domestic players.
In this regard, it becomes imperative for the government, regulation and exchanges to take larger responsibility in creating awareness, conducting training and education, strengthening skill sets and certification in currency futures. Exchanges such as MCX-SX are already active through various possible media in this regard.
In the globalizing economy, it is essential that this market with wider implication for connecting the domestic stakeholders with the global markets should be strengthened to withstand global effects which would be passed on through FII participation. A strong and resilient domestic market can always act as the shock absorber for the entire economy at times of financial crisis as like the one now and make the globalization process seamless.