RBI tightening on exchange-traded derivatives forces a sharp volume drop in USD/INR contracts at NSE, raising concerns about liquidity in India’s currency market.
RBI curbs on exchange-traded currency derivatives, requiring proof of underlying exposure, caused a collapse in NSE USD/INR futures volumes. Open interest fell to multi-year lows as speculative positions were forced to unwind. The curbs reduce short-term liquidity and could increase volatility in the spot rupee as hedging shifts to less transparent NDF markets.
Retail and proprietary traders without a documented underlying exposure can no longer trade exchange-traded currency derivatives, forcing them to exit positions and drying up volume.
Directly, the curbs are designed to reduce speculative pressure on the rupee, aiming for stability. However, reduced hedging avenues could cause sporadic illiquidity in spot during risk-off events.
Many are moving to offshore non-deliverable forwards (NDF) or over-the-counter markets, where RBI regulations don't apply, potentially fragmenting the market.
Trading in currency derivatives on the National Stock Exchange of India plunged after fresh RBI mandates required proof of underlying exposure, drying up speculative positions. This marks a steep decline in volumes and open interest for USD/INR contracts, dealing a blow to the exchange's currency segment. The curbs aim to stabilize the rupee but risk pushing hedging activity to offshore markets.
The RBI mandated that all exchange-traded currency derivative contracts must be backed by an actual underlying exposure, effectively eliminating speculative positions and requiring proof of hedging needs.
It shrinks the onshore currency derivatives market, reducing liquidity and potentially making it harder for corporates to hedge their forex risk at competitive rates.
Trading volumes on NSE's currency segment have plummeted, with daily turnover dropping to a fraction of pre-curb levels, while offshore NDF markets saw increased activity.