India INX all set to launch INR-USD futures and options contracts – here’s what it means and why it’s important
REUTERS/Thomas White/Illustration/File photo
- India INX, India’s first international exchange is all set to launch INR-USD futures and options contracts on May 8.
- This is expected to help the Reserve Bank of India (RBI) reduce the volatility in the value of the Indian rupee and avoid a repeat of the 2013 taper tantrum when the rupee tumbled by 20%.
- In April 2019, London surpassed Mumbai in Rupee trades, totaling $46.8 billion against $34.5 billion in India, essentially ceding control to foreign players.
Initially recommended by the Dr. Usha Thorat Committee in 2019, the Rupee derivatives trade was greenlit by RBI in November 2019. Now, BSE subsidiary India INX is gearing up to launch it at its exchange located in GIFT city in Gujarat.
But what exactly does INR-USD futures and options contract mean and why is it important? We answer those questions here.
Why is this important?
Allowing INR-USD contracts in IFSC allows the RBI to reduce foreign influence on the Indian rupee, and perhaps a repeat of the 2013 taper tantrum.
In 2013, foreign speculators sent the Indian rupee tumbling by 20%, almost leading to a financial crisis in India. This was triggered by a statement by the then-chairman of US Federal Reserve Ben Bernanke, who said the US would taper off its $85 billion a month bond purchase programme at some point.
Reducing arbitrage opportunity between Indian and foreign centers will reduce volatility
In 2019, London surpassed Mumbai to become the top center for trading in rupee, at $46.8 billion in April 2019 compared to $34.5 billion in India. Since 2016, rupee trading increased in other centers like Singapore, Hong Kong and the United States, too.
“This may further narrow down the arbitrage between on-shore and off-shore markets and induce lower volatility in rupee emanating exclusively from off-shore markets,” Madhavi Arora, lead economist at Edelweiss Securities told Economic Times.
In the end, to an average Indian, reduced volatility in the Indian rupee will reduce the risk of inflation.
What are futures and options contracts?
Futures contracts are agreements to buy or sell an underlying stock at a future date. Essentially, a futures contract is a promise to buy or sell the asset at a future date. The amount to be paid will be decided based on the market prices on the date of expiry of the contract.
Options contracts are of two types – call and put. Call options give the buyer the right to purchase a stock at a set price during the life of the contract. They are bought when the buyer expects the stock price to increase in the future.
Put options give the buyer the right to sell a stock at a set price during the life of the contract. They are bought when the buyer expects the stock price to decrease in the future.
How do currency futures and options contracts work?
When it comes to currency contracts, buyers and sellers exchange one currency for the other. If you want to buy USD and have INR, you would need to find a seller who wants to sell USD in exchange for INR.
For example, if you enter into a INR-USD futures contract to buy $100 at ₹75 per dollar on May 20, you will have to pay ₹7,500 and take delivery of $100, regardless of the exchange rate prevailing on May 20.
Now, in currency futures and options, there is an element of speculation. This gives rise to the futures and options values increasing and decreasing based on the demand and supply. Speculators try to make a profit by betting on this difference.
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