A day after the Reserve Bank announced its plan to intervene in the exchange-traded currency derivatives market, the RBI on Thursday introduced cross currency pairs in exchange traded currency derivatives market in order to facilitate efficient hedging. The RBI steps have come ahead of the US Federal Reserve plan to hike interest rates in December, a move which could lead to volatility in the rupee and capital flows.
The RBI has now allowed cross currency futures and exchange traded cross currency option contracts in the currency pairs of euro-dollar, pound sterling-dollar and dollar-Japanese yen (JPY). Further, exchange-traded option contracts in the currency pairs of euro-rupee, pound-rupee and yen-rupee have also been introduced in addition to the existing dollar-rupee pair. “The cross currency contracts will enable direct hedging of exposures in foreign currencies and facilitate execution of cross-currency strategies by market participants,” the RBI said. The decision to allow cross currency pairs was first announced on the fourth bi-monthly monetary policy review on September 29.
“Market participants including residents and foreign portfolio investors, are allowed to take positions in the cross currency contracts without having to establish underlying exposure subject to the position limits as prescribed by the exchanges,” the RBI said. The existing position limits of $15 million for dollar-rupee contracts and $5 million for non dollar-rupee contracts for residents and FPIs, without having to establish underlying exposure, will remain unchanged, it said.
On Wednesday, the RBI said it will intervene in the exchange-traded currency derivatives (ETCD) market, if required, and the related data will be published in monthly bulletins. The RBI intervenes in the forex market as and when required in order to manage excessive volatility and maintain orderly conditions in the market. “As a further measure, it has been decided to intervene in the ETCD segment, if required,” the RBI said in a statement. Earlier in March this year, the RBI had relaxed norms in this segment by raising the limit for domestic entities and foreign portfolio investors (FPIs). It had also allowed an aggregate limit of $5 million equivalent per exchange.
The rupee is expected to trade in the 66-68 range against the US D in the next 12-18 months, with the RBI likely to manage the exchange rate proactively to stem excessive volatility from time-to-time, a Deutsche Bank report said. “The RBI has enough foreign exchange reserves in its coffer … to intervene decisively in the forex market, if need arises,” the bank said in its report.