Currency futures to provide further depth and breadth to the market and to be an effective risk management instrument

(Extracted from remarks by Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India on the occasion of the launch of currency futures by National Stock Exchange on August 29, 2008)

We are gathered here to mark an event of great significance in the context of Indian financial markets. Today is the culmination of a process of extensive consultations and deliberations intended to design a framework for introduction of currency futures in conjunction with the existing vibrant OTC market.

Let me say a few words on the impressive growth of forex markets in India in the recent past. As per the BIS Triennial Survey on the global foreign exchange and derivatives market activity (2007), the foreign exchange market in India has grown into the 16th largest market in the world in terms of total daily turnover which was US$34 billion in 2007. The OTC derivatives segment of the foreign exchange market has also increased significantly to register a daily average turnover of USD 24 billion, which is 17th largest among all countries. The daily turnover has increased to US$48 billion in 2007-08. The bid-offer spreads are narrow reflecting the liquidity and efficiency of the market. There is a wide menu of products available in the OTC market which serves a distinct economic purpose.

The biggest challenge in designing a framework for currency futures in India, I may say, was the contextual setting in which the foreign exchange market operates in India. There was no ready template available internationally that we could draw upon since most of the countries that have active currency futures markets are those which are relatively more convertible on the capital account. The endeavour was to have a framework which genuinely sought to provide an additional avenue for risk management while maintaining the integrity of the existing market microstructure.

I believe the currency futures market will seamlessly complement the existing OTC market. As you may be aware, in all countries, including developed markets, OTC segment dominates foreign exchange transactions.

The introduction of currency futures, I am sure, will provide further depth and breadth to the market and fulfill their intended objective as an effective risk management instrument. I would also like to take this opportunity to urge all the market participants to leverage this significant milestone for skill development within as well as at a broader industry level.

On behalf of RBI, I would like to assure our continued commitment to orderly and well thought out development of financial markets, while maintaining financial stability and integrity.



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