The discussion around the migration of volumes from Indian exchanges to foreign bourses has mainly centred around Nifty and other stock indices. But in fact data show that rupee futures trades have also been moving away from Indian to foreign exchanges such as the Singapore Stock Exchange (SGX) and the Dubai Gold & Commodity Exchange (DGCX). Worse, there is little the Centre or the exchanges can do to reverse this shift.
Over the past few years, volumes in exchange-traded currency derivatives have fallen consistently in the domestic exchanges — the BSE, the NSE and the MSEI. At the same time, the rupee futures trades in foreign bourses, especially in SGX, have been gaining traction.
In 2009, almost the entire trading in exchange-traded currency derivatives was onshore. By 2017, the share of onshore exchange-based trading had fallen to 43 per cent. SGX has been chipping away global market share, from nil in 2013 to 26 per cent of the volume in 2017. DGCX has been maintaining a steady share of around one-third of global exchange-traded rupee future volumes.
But since the spot price of currencies can be derived by polling by various agencies, it is not possible to curb trades on overseas exchanges and the OTC or the NDF market by cutting off data feed.
Higher exposure limits
Indian regulators are partly to blame for this migration. To stop the rupee’s steep depreciation in 2012-2013, the RBI had imposed restrictions on exchange-traded currency derivatives, including tight position limits, stopping banks from proprietary trading in this market and de-linking exchange-traded futures from the domestic OTC market.
Consequently, currency futures turnover on Indian exchanges plunged 69 per cent, from ₹70,25,633 crore in 2011 to ₹21,72,229 crore in 2017.
Anindya Banerjee, Deputy Vice-President, Currency and Interest rate Derivatives, Kotak Securities, says, “Though there are limits in foreign exchanges too, they are high.
“Also they are progressive limits that increase with the open interest.”
Even the recent RBI move to increase the limits to $100 million may not enthuse participants, he reckons.
Trading costs on India bourses — brokerage fees, exchange fee, SEBI fee, stamp duty and GST — are also higher. “In offshore markets, apart from brokerage, no charges are levied, and even taxes are low or nil,” says Banerjee.
Longer trading hours
Trading hours in offshore exchanges are also longer: SGX is open from 7:25 am to 7:30 pm (Singapore time), and the DGCX from 7:00 am to 11:55 pm.
Sajal Gupta, Head, Forex & Rates, Edelweiss Securities, says, “Overseas markets are accessible almost 24 hours, whereas we operate from 9 am to 5 pm. This is a dampener.”
“A participant will be more comfortable keeping his trade position or hedges on exchanges that works longer hours and absorbs the impact of global events instantly,” adds Banerjee.
Also, in offshore markets, trade settlements are in US dollars; in domestic markets, it is in rupees, which forces foreign investors to bear an exchange rate risk.