Category: Currency

Yen drops to a fresh 34-year low as Bank of Japan keeps key rate unchanged

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The yen’s relentless decline continued in the wake of the Bank of Japan keeping its key interest rate unchanged, with the currency touching a fresh 34-year low versus the dollar.

It weakened 0.3% to 156.18 as of 1:39 p.m. in Tokyo. The extended slump has heightened speculation that authorities may intervene in the market as soon as today, with further risks to come later when data on the Federal Reserve’s preferred inflation gauge is released.

Investors are on high alert for any rapid snap-back in the yen. They are also wary that Japan may not confirm any intervention, and that some past cases of extreme rebounds have been attributed to algorithmic trading.

The Topix share index rose as much as 1.1% after the BOJ decision, with real estate companies extending gains. The yield on the benchmark 10-year bond slipped to 0.91% from 0.93% earlier in the day.

Meanwhile, the yen is the worst-performer among the Group-of-10 major currencies this year, having already slid 9%. Policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. Finance Minister Shunichi Suzuki reiterated after the BOJ meeting that the government will respond appropriately to foreign exchange moves.

“And yet again, BOJ has proved that it can surprise dovish to even the most dovish expectation on the Street,” said Charu Chanana, a strategist at Saxo Capital Markets. US personal consumption data later in the day will be on the radar, “and we are back to waiting for an intervention to stop the rout in the yen. But any intervention, if not coordinated and without the support of a hawkish policy messaging, will still be futile,” she said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Yen weakens past key 155 level, adding to intervention risk

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The yen weakened beyond 155 per dollar for the first time in more than three decades, fueling risk that the key level may prompt Japan to step into the market.

The Asian nation’s currency depreciated as much as 0.4% to a session low of 155.37 on Wednesday, marking the first time since June 1990 the yen crossed the 155 level against the greenback. The yen pared the move and traded at 155.21 as of 7:27 AM in Tokyo on Thursday.

“Intervention risk remains high, regardless of the level,” said Win Thin, global head of markets strategy at Brown Brothers Harriman.

Helping drive the yen lower Wednesday was demand for contracts to sell it against both the greenback and euro, according to data from the Depository Trust & Clearing Corporation. That included a $300 million purchase of options that expire in a month to sell the Japanese currency at 156 per dollar, pressuring the yen in the spot market.

Japanese officials have said repeatedly that they will take necessary action to address excessive moves in the yen if needed. The authorities have emphasized a focus on the pace of the currency’s depreciation rather than a precise level. Traders will be alert to any comments from officials in Tokyo on Thursday that suggest a higher state of readiness for intervention.

In a trilateral statement last week, the US, Japan and South Korea said they would continue to consult closely on foreign-exchange market developments while acknowledging serious concerns of Japan and Korea about the recent sharp depreciation in their currencies.

The yen has slumped about 9% so far this year, making it the worst performing currency of Group-of-10 countries, even after the central bank in March raised the short-term policy rate for the first time since 2007. Adding to the currency’s plight is the risk of higher oil prices amid rising tensions in the Middle East because they could hurt Japan’s trade balance.

Traders and strategists are looking ahead to the conclusion of the Bank of Japan’s policy meeting on Friday, at which nearly all economists surveyed by Bloomberg expect the central bank to keep monetary policy on hold.

“A surprising rate hike would make much more sense than FX interventions,” said Piotr Matys, senior FX analyst at InTouch Capital Markets Ltd. While Matys sees it as a low-probability scenario, “the most efficient way to stabilize a battered currency is to surprise the market with a rate hike.”

The Federal Reserve, meantime, is poised to deliver a monetary policy decision next week — with investors closely watching the gap in yields between the US versus Japan. An update of the Fed’s preferred inflation gauge is set to come out after the BOJ decision on Friday.

“The Ministry of Finance will probably be hoping that the Bank of Japan can offer some hawkish commentary after Friday’s policy meeting,” said Jane Foley, head of foreign-exchange strategy at Rabobank. “However, if US PCE comes in strong later that day, it would reinforce US dollar strength.”

Japan intervened in markets three times in 2022 to prop up the yen after the currency weakened to 151.95 against the dollar. Tokyo spent more than ¥9 trillion ($58 billion) across three occasions in that campaign, which was conducted largely without criticism from international allies including the US.

What made the September-October 2022 intervention successful “was that it coincided with a peak in US rates,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC. “BOJ officials cannot be as confident now.”

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Japan ‘very close’ to currency intervention, former forex chief says

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Japan is on the brink of currency intervention if the yen weakens any further, according to one of the country’s former top currency officials.

“Amid no change in US and Japan interest rates, the yen has depreciated against the dollar quite rapidly,” said Mitsuhiro Furusawa, former vice minister of finance for international affairs, in an interview with Bloomberg on Tuesday.

“Should this trend continue, intervention will come,” Furusawa said, adding that “we are very close.” He cited market reaction to US data as a factor that may nudge Japanese authorities to act and pointed to last week’s joint statement between Japan, the US and South Korea as an indication that Tokyo’s allies won’t stop it entering the market.

The comments from the former finance ministry official come with Japan’s currency close to Tuesday’s fresh 34-year low of 154.88 against the dollar. Finance Minister Shunichi Suzuki reiterated Tuesday that authorities are prepared for action to address the situation.

The yen continues to look vulnerable with a Bank of Japan meeting this week and the Federal Reserve’s preferred gauge of inflation due out later on Friday.

Furusawa sees the possibility of the BOJ raising interest rates again as early as July, but, like almost all economists surveyed by Bloomberg, he expects no rate change on Friday.

Market participants and policymakers are wary that the widely expected stand-pat decision on Friday after last month’s historic rate hike may trigger another slide in the currency.

Allowing market players to push the exchange rate can’t be tolerated, Furusawa said. “No one thinks it’s a good idea to leave speculators unchecked,” he said.

Furusawa expects Japan’s authorities to step into the market before the currency reaches 160 yen to the dollar. Some market participants, such as Bank of America Corp., foresee the yen sliding further to 160.

Japan spent around $60 billion intervening in currency markets in September and October of 2022 when the yen approached the 146 and 152 levels.

Last week, Suzuki issued a rare joint statement with US Treasury Secretary Janet Yellen and South Korean Finance Minister Choi Sang-mok in Washington, stating that they would continue to consult closely on foreign exchange developments. The three nations also acknowledged the serious concerns felt by Japan and Korea over the recent sharp depreciation of their currencies.

“With the statement, it’s hard to imagine the US will stop Japan if it actually takes action,”said Furusawa, while noting that the statement does not give Japan a complete go-ahead to intervene.

The main factor behind the recent weak yen is the rate differential between Japan and US, according to Furusawa, who now heads the Institute for Global Financial Affairs at Sumitomo Mitsui Banking Corp. Furusawa previously served as the finance ministry’s top currency official from 2013 to 2014 before joining the International Monetary Fund as deputy managing director.

The difference in policy rates between the two countries looks set to remain unchanged until the summer at least, with surveyed economists flagging October as the most likely month for the BOJ to move again.

Governor Kazuo Ueda reiterated in parliament on Tuesday that it’s appropriate to maintain an accommodative environment for a spell, while in the US, Fed Chair Jerome Powell and other officials have signaled that it’ll take longer to cut rates.

“A July hike is a possibility if the bank is convinced it can raise rates after the effects of the income tax rebate and wage hikes are seen,” said Furusawa, referring to a one-off tax break for households dealing with elevated levels of inflation. Unions have secured their biggest annual pay raises in decades this year starting from April.

At its upcoming meeting, the BOJ is expected to project 2% price growth in the fiscal year beginning in April 2026, partly reflecting the optimism surrounding wages and prices. If the bank does so, that may support the case for a July move, Furusawa said. The BOJ could then hike again later in the year, he added.

Weakness in the yen could also be a motive for the bank to move if that starts to affect inflation, but changing monetary to correct currency trends would be difficult, he said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Rupee off record low on likely central bank intervention, Iranian official’s comment

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Indian rupee recovered after slipping to a record low on Friday, on likely intervention by the central bank and comments by an Iranian official that there was no missile attack on the country.

The rupee was at 83.5175 to the US dollar at 11:15 a.m. IST, marginally up from 83.5375 on Thursday. The currency had dropped to 83.5750, a lifetime low, in early trading.

The Reserve Bank of India (RBI) likely intervened in the onshore over-the-counter market and in non-deliverable forwards to help out the rupee, traders said.

The RBI “just completely knocked out” any thoughts “of a big push” higher on USD/INR, a FX trader said.

“I suspect a number of traders have been caught on the wrong side due to RBI’s resolute defence (of the rupee) and the clarification from Iran.”

Israel launched an attack on Iranian soil on Friday, sources said, in the latest tit-for-tat exchange between the two arch foes, whose decades of shadow war has broken out into the open and threatened to drag the region deeper into conflict.

Iranian media reported explosions, but an Iranian official told Reuters those were caused by air defense systems.

The Natanz nuclear site, the centrepiece of Iran’s uranium enrichment program, is in Isfahan province.

U.S. equity futures and Asian shares were off the worst levels for the session and Brent crude, having climbed past $90.50 at one point, was last at $88.86 a barrel.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

How low does the Rupee go when the Middle East erupts

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In today’s tightly woven world, big world events like the recent flare-up between Iran and Israel rock the boat in financial markets. This latest showdown, coming right after the Russia-Ukraine crisis, is a stark wake-up call to just how much these global power struggles can mess with market stability.

To dive into the impact of the recent escalation, it is important to dig deeper into the historical trends in the currencies.

Instability in the Middle East holds significant sway over global oil markets, safe-haven assets, and currencies. As a crucial oil source, any disruption to its supply can trigger speculation-driven price hikes. These spikes historically influence global inflation rates and trade balances, particularly for countries like India heavily reliant on oil imports and, subsequently, currencies. However, it’s debatable whether these countries ( Israel, Palestine, Iran) contribute a sizable portion to the world’s oil market? Perhaps not directly, but the surrounding regions could be impacted. If major players like Saudi Arabia, Iraq, or the UAE were to face similar instability, the true impact would become evident.

A list of conflicts in the Middle East since 2000 and how long it stayed:
• Second Intifada: September 2000 to February 2005
• Second Lebanon War: July 2006 to August 2006
• Gaza-Israel conflicts or Operation Cast Lead: December 2008 to January 2009
• Israel-Gaza conflict or Operation Protective Edge: July 2014 – August 2014
• Israel- Hamas war: Oct 2023 to till date

Out of the five major historical tensions, three cases saw wars lasting hardly a month with limited impact on the financial market. The first case, the Second Intifada, endured for 4.5 years but had a limited impact on the financial market. Furthermore, the ongoing Israel-Hamas war has persisted for over six months, yet it has had a negligible impact on equities, as multiple global equities reached all-time highs during this period. Surprisingly, the yen, often considered a safe-haven currency, did not appreciate. However, gold soared to an all-time high due to central banks’ accumulation of the safe-haven asset in their reserves

Governement and central bank’s presence of mind

Over the past five years, it has been observed that governments and central banks take immediate steps to address uncertainties in the market. During the COVID-19 pandemic, the risk-off sentiment was short-lived, lasting only a couple of months. To support growth and economic activity, governments and central bankers swiftly eased their stance.

Also Read: Rupee vs US Dollar: INR falls to record low of 83.54 versus USD

Similarly, in 2022, during the Russia-Ukraine war, central banks intervened in the market to stabilise volatility and FX rates. For instance, in India, the RBI announced Sell-Buy swaps and utilized FX reserves. Additionally, during the 2023 US banking crisis, the impact on the global equity market remained minimal.

Similarly, during the Israel-Palestine war in October 2022, equities experienced modest declines of less than 2 to 3%, and oil prices remained relatively stable for the following months. Therefore, we believe that even if the Israel-Palestine-Iran conflict persists or escalates, global authorities will likely take measures to manage the situation.

Coming to the domestic factors and outlook on the Rupee during such geopolitical tension:

During wartime, crude oil prices typically soar due to concerns over supply disruptions. The possibility of Brent crude reaching $100 per barrel amidst escalating tensions in West Asia, and potentially remaining at that level in the near term, could impact key macro-indicators. According to analysis, crude oil at $100 per barrel could raise CPI inflation by 40 to 60 basis points (bps) from the RBI’s estimate, assuming full pass-through to retail consumers of automotive fuels. Additionally, it could inflate the oil import bill by $2 to $3 billion. Nevertheless, the aforementioned impacts may not fundamentally alter economic activity.

What could offset the impact of geopolitical tension?

1. RBI’s FX reserves: Over the past 1.5 years, the RBI has significantly bolstered its FX reserves, while maintaining the currency between $81.50 to $83.50 billion. After a decline to $528.37 billion in October 2022, they swiftly resumed accumulation, reaching an all-time high of $648.56 billion. In addition to foreign currency assets, the RBI has also been observed increasing its gold reserves, mirroring trends seen in other global central banks. These reserves serve as a robust pillar during periods of financial market uncertainty or significant outflows of hot money.

2. Stronger domestic fundamentals: Foreign Portfolio Investor (FPI) flows have remained robust throughout the calendar year 2024, boasting impressive inflows totaling $10 billion. Additionally, the Reserve Bank of India (RBI) holds substantial reserves, reaching a record high of $648 billion, providing a significant buffer during times of uncertainty. Furthermore, the trade balance reflects encouraging signs, standing at an 11-month low of $15.6 billion. In terms of economic indicators, inflation remains under control, hovering around 4.85%, while Industrial Production (IIP) growth stands at a healthy 5.7%. Moreover, the Current Account Deficit (CAD) and Balance of Payments (BoP) portray a balanced and favourable outlook. Lastly, both the Manufacturing and Services Purchasing Managers’ Index (PMIs) are outperforming those of peer and developed countries, underscoring the resilience and strength of India’s economic fundamentals. These factors collectively indicate a promising trajectory for the Rupee’s potential resurgence.

Outlook

Overall, we believe that the intensity of geopolitical tensions and their impact during proactive environments is minimal. Currently, governments and central banks have established a war-proof shield for their economies, prepared to take immediate action. Furthermore, being a net importing country, India can manage higher oil prices as the RBI always maintains a buffer and revisits projections. Amid the backdrop of global uncertainty, domestic fundamentals remain resilient. Therefore, we anticipate that pressure on the Rupee will be short-lived and restricted to levels between 83.50 to 83.70. In the near term, we foresee the Rupee moving towards 83 to 82.80, and over the medium term, between 82.50 to 82.00.

Also Read: Could rising global risks trigger an equities sell-off? Taimur Baig and Mark Matthews answer

Amit Pabari is Managing Director at CR Forex Advisors. The views expressed in this article are his own.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Rupee vs US Dollar: INR falls to record low of 83.54 versus USD

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Indian rupee slipped to its record low against the US dollar on Tuesday, April 16 amid rising geopolitical tensions in the Middle East. The rupee fell to 83.53 vs the dollar at close, after falling to an all-time low 83.54 against greenback. The currency settled at 83.45 vs the dollar on Monday.

The dollar index — which measures the American currency against the yen, the pound, the Canadian dollar, the Swedish krona, the Swiss franc and the euro — was last trading marginally higher, above the 106 mark. The dollar index is at its highest level in nearly six months.

The value of the US dollar against a basket of six peers is inversely proportional to the value of the rupee. That is, if the value of the greenback rises, the value of the rupee depreciates, and vice versa.

Crude oil benchmarks slipped on concern about the escalating tensions in the Middle East. At the last count, Brent crude futures were trading 0.3% lower at $89.82 per barrel. WTI futures, too, were trading lower at $85.12 per barrel.

The rupee breached the 80 mark against the US dollar for the first time on July 19, 2022, and has since hit a series of lows.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

US Dollar gets costlier to borrow in China in new sign of Yuan woes

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The premium to borrow dollars in China’s local markets has jumped over the past month, another example of the resurgent US currency’s global reach and persistent headwinds facing the yuan.

China’s overnight interbank dollar lending rate hit a record 5.47% on March 29 after a steady climb, before easing to 5.42% Thursday, Bloomberg-compiled data show. That has pushed its gap with the US secured overnight financing rate, a global benchmark, to the widest since July twice in the past two weeks.

The tightening supply of the US currency in China has coincided with the dollar’s global rebound this year as a series of upbeat economic data weakened the case for the Federal Reserve to cut interest rates. If the trend persists, Beijing may have to resort to a familiar tool to ease dollar liquidity as well as pressure on the yuan.

“The gap hinting at an imbalance between supply and demand for dollar liquidity points to pressure on the yuan,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “There is a chance that the PBOC might unleash some dollar liquidity via cutting the foreign exchange reserve requirement ratio.”

Despite the nation’s $3.2 trillion foreign reserves, the amount of foreign currencies that Chinese companies and banks can tap is subject to a confluence of factors, including supply from large state-owned lenders.

In a bid to defend its currency, China has slashed the ratio that sets the amount of foreign-currency deposits banks need to hold as reserves three times since 2022, with the last reduction in September.

Since then, China’s central bank has mostly relied on a strong daily reference rate and dollar sales by state lenders acting as its proxy to alleviate pressure on the yuan. After falling below a key support level in late March, the Chinese currency has extended its drop onshore to a five-month low against the greenback.

However, there’s only so much Beijing can do in the face of the dollar’s global strength.

While China might consider more tools to support the yuan, they “can only help to slow depreciation pressure as we have seen in the past and buy time until the broader market forces shift or fundamentals improve at home,” said Fiona Lim, a senior currency strategist at Malayan Banking Bhd. in Singapore.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Dollar firms, yen skids as US Fed cut wagers crumble

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The dollar was firm on Thursday after hotter-than-expected US inflation data squashed lingering expectations of the Fed starting its rate-cutting cycle in June, while the yen languished at the levels last seen in the middle of 1990.

The yen’s slide to a 34-year low of 153.24 per US dollar on Wednesday brought intervention fears back as authorities in Tokyo reiterated that they would not rule out any steps to deal with excessive swings.

“Recent moves are rapid. We’d like to respond appropriately to excessive moves, without ruling out any options,” Japan’s top currency diplomat Masato Kanda said.

Japan intervened in the currency market three times in 2022 as the yen slid toward what was then a 32-year low of 152 to the dollar.

On Thursday, the yen strengthened 0.20% to 152.88 per dollar, just below the 153.24 level touched on Wednesday after data showed the U.S. consumer price index rose 0.4% on a monthly basis in March, versus the 0.3% increase expected by economists polled by Reuters.

Kyle Rodda, senior financial market analyst at Capital.com, expects Tokyo authorities to keep talking tough and intervene if things look disorderly.

“The very interesting element is how the Bank of Japan eventually handles this … We might see greater hawkishness from here and that would be the catalyst for a more sustained turnaround,” Rodda said.

Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank would not directly respond to currency moves in setting monetary policy, brushing aside market speculation that the yen’s sharp falls could force it to raise interest rates.

The Japanese central bank last month ended eight years of negative interest rates but yen has remained rooted near 151 per dollar levels since then.

Low Japanese rates have made the yen the funding currency of choice for carry trades for years, in which traders typically borrow a low-yielding currency to then sell and invest the proceeds in assets denominated in a higher-yielding one.

US Fed wagers

Following the inflation data, traders drastically dialled back their bets on interest rate cuts this year as well as when the Federal Reserve will start its easing cycle.

Adding to those doubts, minutes from the Fed’s March meeting, released on Wednesday, show policymakers were already disappointed by recent inflation readings before the latest report.

Markets are now pricing in an 18% chance of the Fed cutting rates in June, compared with 50% before the CPI data, according to CME FedWatch tool, with September turning out to be the next starting point for rate cuts.

Traders are also pricing in 43 basis points of cuts this year much lower than the 75 basis points of easing projected by the U.S. central bank. At the start of the year, traders had priced in over 150 bps of cuts in 2024.

The latest trends in core CPI are moving in the wrong direction for the Fed to gain enough confidence on inflation by the time of the June FOMC meeting, according to Kevin Cummins, chief US economist at NatWest.

“We now expect the first cut (25 bps) to occur at the September meeting (instead of June) followed by two additional cuts this year.”

The hot inflation report led to U.S. Treasury spiking higher and taking the dollar index, which measures the greenback against six rivals, more than 1% higher on Wednesday to near five month peak of 105.30. The index was last at 105.13 on Thursday.

The yield on 10-year Treasury notes eased a bit to 4.554% in Asian hours, hovering near the five month peak of 4.568% it touched on Wednesday.

The euro was last at $1.0744, having dropped 1% on Wednesday ahead of the European Central Bank meeting later in the day. The ECB is expected to stand pat on rates but the focus is on comments from officials to see whether June will be the starting point for cuts in the region.

Sterling was last at $1.2538, up 0.06% on the day. The Australian dollar was little changed at $0.651, while the New Zealand dollar eased 0.17% to $0.598.

Also Read: India, China should urgently address ‘prolonged situation’ on borders, PM Modi says

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bottomline: The Great FX F&O Slumber Party!

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The exchange traded foreign currency derivative trading mess is a case study in regulatory oversight and all from RBI to SEBI to stock exchanges and brokerages are to blame.

How does what’s happening in a ₹500 lakh crore turnover market get missed for 14 years? That’s a question RBI, SEBI and stock exchanges must answer. And, if it wasn’t missed, why the sudden wake-up call?

On April 5, RBI Governor Shaktikanta Das clarified that there was no change in regulations on currency derivatives trading. To emphasise his point, he added: “No one can say this is new”.

The previous evening RBI in a press release stated currency derivatives regulations are guided by the Foreign Exchange Management Act, 1999, and reiterated in 2000 and 2020 which mandate: “currency derivative contracts involving the INR – both over-the-counter (OTC) and exchange traded – are permitted only for the purpose of hedging of exposure to foreign exchange rate risks.”

The release went on to add: “As announced in the Statement on Developmental and Regulatory Policies dated December 08, 2023 the regulatory framework governing the hedging of foreign exchange risks was comprehensively reviewed in 2020 with a view to ushering in a principle-based regime. Based on this comprehensive review, public consultations, feedback received from market participants and experience gained since then, the regulatory framework has been made more comprehensive in respect of all types of transactions – OTC and exchange traded – under a single Master Direction to enhance operational efficiency and ease access to foreign exchange derivatives.” What this suggests is that key stakeholders would have been consulted in 2020. So, why was no action taken for four years?

SEBI on its part also doesn’t seem out of line on its understanding of the regulations. In its annual report for FY2023, the markets regulator said: “Currency derivatives, which include futures and options contracts, are used to manage foreign exchange risks arising out of fluctuations in currency rates. In India, currency futures and options were launched in August 2008 and October 2010, respectively. Currently, these are available for trading on four currency pairs viz. US Dollars (USD-INR), Euro (EUR-INR), Great Britain Pound (GBP-INR) and Japanese Yen (JPY-INR). The cross-currency pairs such as EUR-USD, GBP-USD and USD-JPY are also permitted for trading.”

So, since 2010 trading in currency derivatives has been permitted knowing that these instruments are meant for hedging underlying exposure risk ONLY. The only relaxation provided by RBI in 2014 was in terms of disclosure. The RBI states: “For the purpose of ease of doing business, the RBI’s A.P. (DIR Series) Circular No. 147 dated June 20, 2014 permitted users of ETCDs to take positions up to USD 10 million per exchange without having to provide documentary evidence to establish the underlying exposure but did not provide any exemption from the requirement of having the exposure.”

While this limit was consequently raised to $100 million, there was no relaxation in the rules on hedging. This begs the question: Didn’t SEBI, Stock Exchanges, Brokers know that they couldn’t trade in such contracts without underlying exposure? To expect that they were unaware requires a leap of faith.

THE PROPRIETARY FLAG

One big red flag is the share of proprietary trades in the total turnover on stock exchanges. Data published in SEBI’s annual report of FY2023 reveals that these account for almost 88% of the total turnover on NSE, the exchange with 85% share of the total turnover in such contracts. It would also seem odd that such published information was not noticed by anyone at RBI.

The least one would have expected any of the regulating bodies—Stock Exchanges, SEBI or RBI—to do is enquire into the nature of such trades to ascertain whether these were done to hedge underlying exposures.

Source: SEBI Annual Report FY2023

Also, it isn’t like this segment was so small to not have drawn any regulatory attention. The sharp jump in turnover and the size of the market should have been enough cause to invite scrutiny. The turnover in the currency derivatives segment jumped by over 60% to Rs 446 lakh crore in FY2023.

Source: SEBI Annual Report FY2023

THE SPOILS OF OVERSIGHT

Who gained from this convenient oversight? This is also something to be aware of. No, it’s not just the brokers. Stock Exchanges led by NSE have earned transaction charges on every trade. Even SEBI has got a share of the spoils as has the Government via GST. And all this for years on end from something that is fundamentally illegal. That’s astounding.

#On Brokerage + SEBI Charges + transaction charges | Source: Zerodha.com

TIME FOR INTROSPECTION

Given how things have panned out, it is time for regulators to take a closer look at what is going on under their watch. Are there other areas where norms are similarly being violated at scale? How is it they missed this violation in the currency derivatives market? Do they need to review their supervisory systems and practices?

The currency derivatives mess is not about the death of a market segment on stock exchanges. It is about the complete failure of our watchdogs to ensure that rules under their watch are followed.

We only hope another oversight of such scale won’t occur again.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI Monetary Policy 2024: India’s forex reserves rise to a record high of $645.6 billion

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India’s foreign exchange reserves hit a record high of $645.6 billion as of March 29, 2024, Reserve Bank of India Governor Shaktikanta Das said on Friday.

Foreign exchange or forex reserves are cash and other reserve assets like gold and silver that are held by a country’s central bank or any other monetary authority, which are mainly used to balance a country’s payments and ensure the currency rate remains stable.

In the previous reported week, the overall reserves had risen to $636.09 billion earlier this month. During the same report, gold reserves had increased by $425 million to $51.14 billion.

Also Read: RBI reiterates 7% GDP growth forecast for FY25 contrary to market expectations of a raise

India’s forex reserves had earlier hit the mark of $645 billion in October 2021. They had then taken a hit after the RBI deployed some of these reserves to defend the currency amidst the global market pressures.

The Indian rupee has strengthened after the RBI’s policy announcement, currently trading at 83.39 against the US Dollar.

Reserve Bank of India’s Monetary Policy Committee left interest rates unchanged on Friday for the seventh straight instance, while leaving most other parameters unchanged as well.

For the financial year 2025, the Reserve Bank of India has pegged the Dollar exchange rate at ₹83 against the US Dollar, compared to ₹82.5 in the second half of the financial year 2024.

Also Read: RBI MPC leaves inflation projection for FY25 unchanged at 4.5%, assuming a normal monsoon

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow