Currently FIIs are not allowed to trade in currency futures.
Currency futures trading currently is being offered by MCX-SX, NSE and BSE.
“Lessons from domestic stockmarkets indicate that FII participation has the potential to make currency futures 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,” said PricewaterhouseCoopers’s (PWC) Principal Consultant, Chiragra Chakrabarty.
With FIIs participation gaining momentum without the development of the domestic market in an asset-class like the Rupee, it would make markets sway in line with global speculation with little weight to domestic fundamentals and make the economy vulnerable to such global financial meltdowns as the recent one, he said.
In view of the promising performance of currency futures 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.
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 domestic stockmarkets, it is natural to expect the entry of FIIs in the trading of currency futures, Chakrabarty said.
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 Rs 1,000-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.
The average daily turnover in MCX-SX and NSE together are showing continous rise, reaching a level of Rs 2,000- crore (single side) since the trading in currency futures began about four months ago, Chakrabarty said.
Most of the capital market analysts attribute the fall of the Sensex from the 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.
Chakrabarty pointed out that allowing FIIs in currency futures would 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,” he asked.
It is important that in an important segment such as currency futures, the strength of the domestic players should be enough to show the real strength of the economy, he said.
FIIs have the ability for trading in domestic and global exchanges whereas domestic market intermediaries have access only to local markets, thus posing the problem of an unequal level-playing field, he said.
FIIs with a 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,” Chakrabarty said. Bureau Report
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