Dubai: A Dubai futures bourse began trading the world’s first contracts on the Indian rupee on Thursday without the blessing of India’s central bank, which may lose some control over the partially convertible currency.
The Dubai Gold and Commodities Exchange (DGCX) said it launched the non-deliverable rupee-dollar contract to tap India’s burgeoning foreign trade, especially with the UAE, New Delhi’s third largest trading partner.
The DGCX, based in of Dubai, said it had discussed the contracts with the Reserve Bank of India, which bought $22 billion in the five months to March to check the rupee’s rise.
“They would not express an opinion one way or the other, which is our point of view is quite satisfactory,” David Rutledge, a director at DGCX, told reporters in Dubai.
“The market is outside the jurisdiction of India’s central bank, which places curbs on trading in the rupee.”The rupee has been convertible on the current account since 1994, meaning it can be changed freely into foreign currency for specific purposes such as trade-related expenses. But it cannot be converted freely for activities such as acquiring overseas assets.
“With the introduction of rupee futures, the Reserve Bank of India’s intervention will also become slightly ineffective,” said Srinivas Sribashyam, head of currency trading at Bank Muscat International, in Oman. “They will be keenly watching the Dubai rupee futures and it will be another source of frustration for the RBI,” he said.
The central bank, which says it intervenes to smooth volatility, declined to comment.
“I don’t think they like it really … I don’t think they can do anything about it,” A.V. Rajwade, a member of an official panel on capital account convertibility said in New Delhi.
A central bank-appointed panel has recommended a plan to allow fuller rupee convertibility and greater movement of capital in rupees by the end of the2010-11 fiscal year.
Rupee futures were likely to be a preferred hedging and investment mechanism against currency fluctuations over the existing non-deliverable dollar/rupee forward market (NDF), some analysts say.
“Like in all over-the-counter markets, NDF has counterparty risk exposures and in futures contract traded on exchange there are no counterparty exposure risks because of the margining system,” Rajwade said.
Trading in NDF rupee-based contracts averaged about $500 million a day in the second quarter of 2006, the Bank for International Settlements in Basel, Switzerland has said.
“Having a platform that provides price discovery of the rupee will actually enhance the NDF market by making those contracts easier to price,” said Ben Floyd, general manager of business and product development at DGCX.
India’s currency climbed around nine per cent this year on increased capital flows as Asia’s fourth-biggest economy expanded at the fastest pace in almost two decades.
Dubai, which wants to ride India’s economic growth much as Hong Kong benefited from the rise of China, set up an exchange in 2005 to encourage foreign firms, including those from India, to list in its new dollar-based financial centre.
Rupees trading in Dubai focused on the key June contract. Settlement price for Rs100 was $2.4583, with 645 lots having been traded.
“The volume is very good and it is more than what everyone in the market had expected, perhaps far beyond what RBI itself had expected,” said a Dubai-based trader.
“Many people in the region were looking forward to this contract and small companies in India will be using it.”
Each non-deliverable rupee-dollar contract represents Rs2 million ($49,360). The maximum price fluctuation is $2 per contract.