India's exchange-traded currency derivates volumes to plunge by 80% over RBI's new hedging rule

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SMC Global Securities. "From our point of view, this market is practically over, at least for the time being,'' added Biswas. The central bank said it would allow exchanges to offer forex derivative contracts involving the rupee only for contracted exposure, or hedging, compared the current allowance of up to $100 million without any explicit underlying exposure.

Small clients typically use the forward market via banks to hedge their currency exposures and will always have an underlying, a source aware of the central bank's thinking told Reuters on the condition of anonymity. The rule, which comes into effect from April 5, was reiterated by exchanges on Monday following concerns raised by brokers about its impact on volumes. "The unintended consequence of this will be that liquidity will dry up significantly and the small and medium sized companies - the hedgers - will lose access to risk management tool," said Anindya Banerjee, head research - FX and interest rates at Kotak Securities.

USD/INR April futures open interest dropped by $833.6 million, or 18.5 per cent, on Tuesday. An official at a large brokerage pointed out that only a small portion of their clients - corporates and foreign portfolio investors - would be able to meet the hedging specification. According to a recent publication by NSE, India's leading exchange for currency derivatives, corporates accounted for just 3.9 per cent of the currency derivatives turnover based on notional turnover in February while foreign investors contributed 6.2 per cent.