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After scraping the prohibition on options in SCRA in 1995 RBI permitted foreign currency options in currency pairs other than Rupee, interest rate swaps, currency swaps and other risk reductions OTC derivative products to be traded in the market. It also helped to become forex trading more efficient and time frame for transactions has also improved.
Currency futures, when they are finally allowed, will have to address a number of limits on hedging, but they will have clear advantages over forwards: no default risk, more liquidity in times of uncertainty or crisis, and price transparency, since margin is not calculated based on spot values.

Average daily global turnover in traditional foreign exchange markets rose to $1.9 trillion in April 2004, up by 57% at current exchange rates and by 36% at constant exchange rates as compared to April 2001. Corresponding average daily global turnover in the OTC is $1.2 trillion, 112% and 77% respectively.

Rupee forward contracts market has been growing rapidly with increasing participation from corporate, exporters, importers, banks and FIIs. Operational freedom to corporate entities through rebooking cancelled contracts helped sustain growth. Due to tenuous links with the interest rate differential and low bid offer spread, the liquidity in the Indian forwards market is mainly for the end maturity contracts. Recently mutual funds have been allowed to invest in rated securities of countries with convertible currencies within existing limits.

The RBI has permitted authorized dealers to offer cross currency options to the corporate clients and other inter bank counter parties to hedge their foreign currency exposures clearing the way for potential extraordinary gains from the currency position. Another spin-off of the liberalization and financial reform was the development of a fledgling market in FC-RE swaps.

The Indian forex derivatives market is still in a nascent stage of development but offers tremendous growth potential. Growth in the underlying spot/forward markets, growth in the rupee derivative markets, increasing convertibility on the capital account, supporting regulatory structure and favorable tax laws can further develop this market.

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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.