Rupee is darling of futures traders

Dubai: The Indian rupee is fast emerging as one of the most traded currencies on futures markets as the increased exchange rate volatility combined with improved arbitrage opportunities are boosting volumes on all exchanges that trade rupee futures.

The Indian rupee was the world's third most-traded currency on futures markets in the first half of 2010, followed by the dollar and euro, according to data from the Washington-based Futures Industry Association.

The surge in rupee trading volumes is reflected in volumes on the Dubai Gold and Commodities Exchange (DGCX), which pioneered rupee futures contracts on an exchange in June 2007.

DGCX's Indian rupee/dollar futures extended its outstanding run over 2010 into the new year, setting a fresh all-time daily volume record of 11,968 contracts on January 5, 2011. The day's volume was in excess of $525.21 million (Dh1.93 billion).

"The Indian rupee futures contract continues to attract ever greater interest and participation as more market participants become aware of its unique status as the only Indian rupee futures contract available for trading and hedging outside of India," said Eric Hasham, CEO of DGCX.

Record volume

The new daily volume record follows the DGCX Indian rupee futures' exceptional success in 2010. Its 2010 annual volume of 480,725 contracts represented 25 per cent of the exchange's overall annual volumes of 1.925 million contracts.

Indian bourses trading in rupee futures have also experienced a huge surge in volumes as the average volume jumped more than threefold last year to $3.2 billion a day on the National Stock Exchange (NSE) of India Ltd. Analysts say investors are moving into futures as they expect the rupee to climb in the range of 2 to 3 per cent by the end of March, outperforming Asia's most-traded currencies except the South Korean won, Philippine peso and Malaysia's ringgit.

The rupee's 2.9 per cent gain last year was driven by inflows from overseas investors seeking to benefit from the nation's higher yields. India's three-year government bond yield of 7.37 per cent is the highest among the major emerging economies except Brazil, where similar-maturity notes pay 12.65 per cent. Comparable securities offer 3.26 per cent in China and 7 per cent in Russia.

"India's rapidly growing trade flows, increased cross border investments and the fluctuation in exchange rates have created a corresponding requirement to hedge risk," said Sajithkumar P.K, Director and CEO of JRG International Brokerage.

Main reason

Analysts say with more exchanges offering futures trading, investors are using arbitrage opportunities and that is helping to boost rupee volumes on all exchanges.

Apart from DGCX, rupee futures are traded on India's NSE, the Multi Commodity Exchange of India Ltd., the Bombay Stock Exchange and the three-month-old United Stock Exchange.

"The main reason behind the rapid rise in volumes of rupee futures on DGCX has been due to the huge arbitrage opportunities between different rupee futures traded in different exchanges," said Pradeep Unni, senior vice-president at Richcomm Global DMCC.

"India based arbitrage traders are also contributing to a large proportion of the daily turnover. It is generally seen that DGCX volumes start to rise after the Indian markets close for day at around 3.30 PM Dubai time," said Unni.