Category: Currency

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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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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Rupee avoids record low despite slew of negative cues

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

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The Indian rupee was little changed on Friday amid expectations that the country’s central bank will intervene, which countered weak risk appetite, a stronger U.S. dollar and rising oil prices.

The rupee was at 83.4150 to the dollar at 9.52 a.m. IST compared with its previous close of 83.4375 and the 83.4550 record low hit on Thursday.

Asian currencies and equities were down, while Brent crude futures settled at its highest levels since October.

That the rupee “is holding” in the face of these factors is “obviously down to the belief” that the Reserve Bank of India (RBI) will yet again intervene, a trader at a bank said.

The RBI had sold dollars when the rupee dipped to a record low on Thursday.

Asian currencies struggled on Friday and risk assets retreated amid hawkish comments from Federal Reserve officials and mounting tensions in the Middle East.

Some Fed officials have adopted a more cautious tone on rate cuts this year in light of a resilient U.S. economy. Minneapolis Fed President Neel Kashkari said inflation continues to stall, no cuts may be required at all this year.

Fed funds futures have prices in 75 basis points of rate cuts this year with a first cut expected in June.

Focus turns to the RBI’s monetary policy decision at 10:00 a.m. IST and the U.S. monthly jobs report due later in the day.

“Arguably (payrolls) is the most influential number for markets. It sets the tone not just for Friday, but for the month ahead,” ING Bank said in a note.

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Rupee vs US Dollar: INR falls to record low 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 Thursday, April 4. The rupee fell to 83.45 vs the dollar, below the previous low of 83.45 hit last Wednesday. The currency started trading today two paise lower from its previous close of 83.42 vs the dollar.

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.

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 lower, but above the 104 mark. 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.

In 2024, so far, the dollar has remained the best-performing G10 currency as rate-cut expectations dialled back over the last few months. Greenback touched a four-and-a-half-month high of 105.10 on Tuesday. The greenback index has gained more than 2% this year. The Indian rupee, on the other hand, has appreciated only 0.3% against the greenback in the same period.

Crude oil benchmarks hold onto the gains from the previous session. At the last count, Brent crude futures were trading more marginally higher at $89.39 per barrel. WTI futures, too, were trading higher at $85.44 per barrel.

On Wednesday, the crude oil prices settled at their highest levels since October on investor concerns about supply disruptions due to conflict in the Middle East, although a jump in US crude oil inventories capped the gains. Brent and WTI futures hit five-month intraday highs for three consecutive sessions.

(With inputs from Reuters)

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RBI tightens rules on currency derivatives to curb speculative trading

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

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Indian stock exchanges–National Stock Exchange (NSE) and BSE–have directed their member brokers to take note of the Reserve Bank of India (RBI) notification dated January 5, 2024, stating that trade in currency derivatives can only be undertaken for hedging purposes after April 5, 2024.

This means that traders are expected to use these instruments to mitigate forex risk rather than for speculative trading.

Below are the details of the RBI notification.

Implementation Date:

The directive from the RBI will be effective from April 5, 2024. This means that from this date onward, currency derivatives can only be used for hedging purposes.

Restriction on Position Sizes:

Previously, users could take positions in currency derivatives up to $100 million without any underlying exposure. However, it appears that this allowance is being eliminated or significantly restricted.

Market Composition and Trading Patterns:

The breakdown of market participants includes proprietary traders, hedgers, and retail investors.

Action Required:

Non-hedgers or speculative traders are required to square off their positions before April 5 to comply with the new regulations.

However, market participants are seeking clarity from the RBI regarding the specifics of the new rules to understand how they will be affected and what actions they need to take to comply.

These changes indicate a tightening of regulations aimed at aligning currency derivatives trading with their intended purpose of hedging forex risk.

It appears that the RBI is seeking to reduce speculative activity in the currency derivatives market and ensure that it serves its primary function of risk management for businesses and investors exposed to currency fluctuations.

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Pound nears four-month low as BOE seen cutting rates before US Fed

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

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The pound fell toward $1.25, a level last seen in December, as traders increased bets the Bank of England will deliver more interest-rate cuts than the Federal Reserve this year.

Sterling dropped 0.1% to $1.2546 on Tuesday, extending Monday’s losses after data showed US factory activity unexpectedly expanded in March for the first time since September 2022.

It’s a sharp reversal for the currency, which traded as high as $1.2894 in early March before coming under pressure after two of the most hawkish BOE members dropped their calls for hikes at the latest meeting.

Money markets currently price 64 basis points of rate cuts in the US this year, compared to 72 basis points in the UK. The chance of a BOE quarter-point reduction in June is at around 63%, while that of a similar move by the Fed briefly fell below 50% on Monday.

In options, traders looking to hedge against a weaker pound need to pay a sizable premium across tenors. Market sentiment toward the currency’s performance this week is near the most bearish level since late October.

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Rupee weakens 1.5% in FY24, but registers best year in three

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

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The rupee ended the financial year with a fall of 1.5% against the US dollar as compared to a close to an 8% decline in FY23. The local currency fared even better compared to other emerging market currencies, despite headwinds like surging oil prices and a strengthening dollar. The currency ended the last day of the year at 83.40.

While the crude prices rallied as much as 19% from its December lows, the dollar index gained 3.5% to 105 during the same period. India has been vulnerable to high global oil prices as the country imports 87% of its oil demand. A high oil prices would widen India’s current account deficit (CAD) and thereby putting pressure on the currency.

However, cheaper oil imports from Russia, buoyant services exports and resilient remittance inflow have cushioned volatility in oil prices. In FY24, India imported over 35% share of its crude oil imports from Russia. The share of Russian crude oil in India’s total volume of imports was a mere 2% in FY22 and 20% in FY23. Additionally, foreign flows of $40 billion to equity and debt markets also supported the currency.

Economists at UBS believe India can sustain global crude oil prices up to $90/bbl, all else remaining unchanged, but the lower the oil goes, the better it would be for the country. The Brent is currently hovering at $87.2/bbl. UBS, which revised its rupee target for the next year said, “Reflecting the current account balance forecast revisions, we shift our USDINR end-FY25 forecast from 84 to 82.”

Among the emerging market, rupee has outperformed most of its peers barring Mexican Peso and Brazilian Real. Notably, the Mexican Peso had the most favourable outlook among emerging-market currencies, according to an HSBC survey of 121 investors from institutions overseeing $362 billion of EM assets. The rally in the peso has been driven by a combination of high-interest rates, low volatility and ample liquidity. While the peso surged 9% in FY24, Brazilian Real gained 1.6%.

Further, the inclusion of Indian Government Bonds in global bond indices is perceived to be a big tailwind for the currency. In September 2023, JP Morgan announced its decision to include India’s bond in its Global EM local Currency Government Bonds Index as of June 2024. Similarly, in March this year, Bloomberg also announced its decision to include India’s Fully Accessible Route (FAR) bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices, phased in over 10 months, starting at the end of January 2025.

Market participants expect these indices’ inclusion will attract inflows to the tune of $25-30 billion over the next year.

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

China’s yuan weakens to four-month low after key level breached

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

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The onshore yuan fell to its weakest in four months, breaching a closely-watched technical level after a months-long effort by Chinese authorities to keep the managed currency in a narrow range.

The yuan weakened as much as 0.3% on Friday, through the 7.20 per dollar level it had mostly held since November. The People’s Bank of China lowered its daily reference rate for the managed currency by the most since early February, a sign to some that Beijing is greenlighting more depreciation amid a bumpy economic recovery.

While the PBOC has been anchoring the currency with the so called fixing since last year, stress has been building of late amid a dollar rebound and weakness in Asian peers such as the yen and Australian dollar. But a sharp depreciation in the yuan also invites pushback from officials, such as state bank selling of the dollar or verbal intervention.

“Seem like this move higher is triggered by the weaker fix,” said Fiona Lim, senior FX strategist at Maybank in Singapore. That sends a sign that the “PBOC is willing to allow some weakness in the yuan as the dollar gains a bit of bullish bias recently.”

Bloomberg’s dollar gauge pushed higher Friday and the Australian and New Zealand currencies weakened. Chinese stocks fell.

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

Yen flounders near four month low, Fed in spotlight

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

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The yen languished near a four-month low against the U.S. dollar and a 16-year trough against the euro on Wednesday as traders wagered Japan’s monetary settings will remain accommodative even as the central bank ends its negative interest rate policy.

While the Bank of Japan on Tuesday ushered in the country’s first rate hike in 17 years, the central bank said it expected to maintain accommodative conditions for the time being, keeping pressure on the yen as U.S.-Japanese rate differentials remain stark.

On Wednesday, the yen weakened to a four-month low of 151.34 per dollar and was last off 0.26% at 151.23, with the multi-decade low of 151.94 within sight and the threat of intervention by Japanese authorities resurfacing.

“I think the focus is again around 152 levels,” said Christopher Wong, currency strategist at OCBC, adding that there was a fair chance of seeing some smoothing if dollar/yen continues to go higher towards 152.

Wong said the move for dollar/yen in the near term will be more a function of U.S. rates with the Federal Reserve decision due later on Wednesday.

Against the euro, the yen weakened to 164.35, its lowest since 2008, while against the pound, yen weakened to 192.37, its lowest since 2015. Japan markets are closed on Wednesday for a holiday.

In a historic shift from decades of massive monetary stimulus, the Japanese central bank on Tuesday ended eight years of negative interest rates and other remnants of unorthodox economic policy.

The Asian currency fell 1% against the dollar on Tuesday after the BOJ decision as most investors had already priced in a change, with analysts suggesting that the “dovish hike” cemented the view that the yen carry trade was far from over.

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

The Australian dollar touched a more than three-week high on the yen at 98.86, having gained 0.7% overnight.

“The carry trade versus the major currencies continues to be in play and is expected to continue for a while,” Daniela Hathorn, senior market analyst at Capital.com said. “This means the yen is likely to see further weakness, especially if the other central banks continue to delay cutting rates.”

US Fed Day

The main spotlight for the day remains on the Fed and although the central bank is not expected to move, its economic projections and comments from Chair Jerome Powell will be in focus.

Last week’s stronger than expected inflation reports led traders to further reduce their bets on rate cuts this year, with markets now pricing in 73 basis points (bps) of easing this year. At the start of the year, traders were pricing in 150 bps of cuts.

Traders are pricing in a 59% chance of the Fed starting its easing cycle in June, the CME FedWatch tool showed, sharply lower than earlier expectations.

“Given the recent rebound in inflation, the Fed decision will be closely scrutinised for whether there is a shift downwards in the median dot projection from 3 to 2 cuts this year,” said Nicholas Chia, Asia macro strategist at Standard Chartered.

“If that happens, I think Powell will try to strike a dovish note in his press conference to prevent a further bear steepening of the US curve.”

The dollar index, which measures the U.S. currency against six rivals, rose to 0.019% to 103.87. The euro was steady at $1.08695.

The Aussie was 0.12% higher at $0.65395, while the New Zealand dollar was little changed at $0.6055, a day after Australia’s central bank held interest rates steady on Tuesday as expected, while watering down a tightening bias to say that it was not ruling anything in or out on policy.

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

Yen slides past 150 per dollar as yield gap with US remains wide

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

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The yen weakened past 150 per dollar after the Bank of Japan ended the world’s last negative policy rate while keeping financial conditions easy for now. Bonds and shares both gained.

The Japanese currency slid as much as 0.8% to 150.38 per dollar, the weakest in two weeks, as of 2:20 p.m. in Tokyo. Government bonds advanced on the BOJ’s slightly dovish tone, sending the 10-year yield down 2 basis points to 0.735%. The benchmark Topix equity gauge climbed 0.8% while the Nikkei 225 Stock Average rose 0.4%.

Ahead of the decision some 90% of central bank watchers had seen the risk of authorities ending their negative rate settings at the meeting. The likelihood had been bolstered after the largest union group announced first-round results to annual wage negotiations that exceeded expectations.

“The decision today itself may be considered quite dovish, dragging the yen lower,” said Koji Fukaya, a fellow at Market Risk Advisory Co. in Tokyo, who said the ending of negative rates and yield-curve control was already priced in. “Keeping an accommodative stance does not mean they will not raise rates from here and therefore, investors would need time to assess the policy outlook.”

The yen had weakened slightly over the course of the week leading up to the BOJ decision as the dollar appreciated on the outlook for slowing rate cuts from the Federal Reserve.

Expectations for the yen to outperform its peers this year had all but evaporated recently, with strategists earlier this month forecasting the currency to end 2024 within a few percent of where it started.

Meanwhile, benchmark 10-year Japanese government bond yields had been edging higher while the nation’s stocks have rallied this year, with the Nikkei 225 reclaiming the high it set back in 1989.

High rates and a strong currency in the US have kept Japan’s 10-year yields and the yen under pressure — the 10-year US Treasury yield is around 4.3%.

The dynamic looks set to continue despite the BOJ’s hike given ongoing strength in the US economy and resilient consumer spending there. In addition, Japan’s central bank will continue to buy bonds and pledges to respond to any rapid rise in yields.

The “new era” of positive interest rates is “a confirmation of the recovery in Japanese economy,” said Charu Chanana, market strategist for Saxo Capital Markets Pte. “Higher returns on savings and investments in Japan can fuel spending power for consumers, and builds a case for Japanese equities to extend their momentum.”

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