The Reserve Bank of India (RBI) and the capital market regulator Securities Exchange Board of India (SEBI) have notified guidelines for exchange traded currency futures. Currency Futures are standardized foreign exchange derivative contracts traded on a stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract.
Under the current guidelines non-resident investors have been restrained from entering into currency derivative contracts in India. As a result, foreign investors such as foreign portfolio investors, hedge funds and even non-resident Indians cannot trade in currency futures in India.
Banks require a minimum net worth of Rs 500 crore to trade in these derivative instruments. The other criteria for being allowed to trade include ensuring a capital adequacy of 10 per cent and a record of containing bad loans after setting aside provisions or net non-performing assets (NPAs) within 3% of the total loans. Banks aspiring to trade in the currency segment also should not have incurred losses over the past three years, according to the norms set out by the regulator. Banks will also need to get the approval of their board of directors if they fit the bill. The RBI has further clarified that banks which do not meet these requirements (including urban co-operative banks) can participate only as clients and that too after securing a regulatory nod. Initially, trading contracts denominated in the US dollar and the Indian Rupee will only be permitted. The size of the contract has been set at $1000 and the tenure at 12 months. The RBI has specified that the contracts will be quoted and settled only in Indian Rupees.
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