India’s two-year-old market for currency futures is growing faster than that for stocks after attracting individual investors with transaction costs that are almost 50 percent lower. The average volume of bets on the rupee’s value at a future date jumped more than threefold this year to $3.2 billion a day on the National Stock Exchange of India Ltd., which introduced the contracts in September 2008. Average daily turnover in the decade-old equity derivatives market rose 56 percent to $22 billion, according to the bourse’s website. “Currency trading can be a thriller,” said Aarukettil Krishnankutty Sugunan, a 61-year-old glass and plywood merchant based in the southern Indian city of Kochi. “Broker fee and margin amounts are very low in rupee, and that allows me to make bigger bets.” Investors are moving into futures as the median forecast of 16 analysts surveyed by Bloomberg shows the rupee will climb 2.2 percent by the end of March, outperforming Asia’s most-traded currencies except South Korean won, the Philippine peso and Malaysia’s ringgit. One-month volatility, a measure of exchange- rate swings used to price options, is the second highest in the region at 9.7 percent, increasing scope for traders to make a profit. The rupee’s 2.9 percent gain this 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 percent is the highest among the major emerging economies except Brazil, where similar-maturity notes pay 12.65 percent. Comparable securities offer 3.26 percent in China and 7.10 percent in Russia. Geojit BNP Paribas Financial Services Ltd., a brokerage partly owned by France’s largest bank, charges 200 rupees ($4.40) as commission on a foreign-exchange investment of 1 million rupees, compared with 385 rupees for stock futures. Lower Margin Requirements The brokerage requires individuals to put down 3 percent of planned rupee-futures investments, known as a margin payment, compared with at least 10 percent for equity derivatives. Rupee derivatives are also exempt from a securities transaction tax that is levied on all other exchange-traded securities, Renjith R.G., the Mumbai-based head of sales at Geojit BNP Paribas, said in an interview on Dec. 16. “It’s much easier for short-term traders to enter and exit currency futures because of the lower margin requirements,” Renjith said. “The absence of a transaction tax helps reduce the broker fee.” Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. India’s currency was the world’s most-traded in the futures markets in the first half of 2010, followed by the dollar and the euro, according to data from the Washington-based Futures Industry Association. Investment Inflows The rupee appreciated 1.7 percent against the dollar this month, the biggest advance after Taiwan’s dollar among Asia’s 10-most traded currencies, according to data compiled by Bloomberg. The currency rose 0.5 percent to 45.23 per dollar today. Ten-year bonds rallied today. The yield on the 7.80 percent bonds due May 2020 slipped five basis points, or 0.05 percentage point, to 7.92 percent as of 12:34 p.m. in Mumbai, according to the central bank’s trading system. Government Bonds India’s government bonds returned 5 percent this year, compared with 1.5 percent earned on Chinese debt, according to indexes compiled by London-based HSBC Holdings Plc. Global investors have poured an unprecedented $38 billion this year into stocks and bonds of Asia’s third-biggest economy, data from the Securities & Exchange Board of India show. Credit-default swaps on State Bank of India, the nation’s biggest lender, have slid 21 basis points this month to 158, according to data provider CMA. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Countering Risk The inflows have pushed up the implied volatility on one- month dollar-rupee options to an average 11 percent since the start of 2008, compared with 5.2 percent over the previous three years, data compiled by Bloomberg show. The jump in the rupee’s volatility increased the need for a wider range of tools to guard against adverse exchange-rate fluctuations, Divya Malik Lahiri, a spokeswoman for the National Stock Exchange, said in an interview on Dec. 16. “Rupee futures have been very helpful in countering currency risk in commodity trade,” Salu Cholayil Kuriakose, a 38-year-old coffee trader based in Sultan Bathery in the southern state of Kerala with exports to Belgium and the U.K., said in a Dec. 3 interview. “We simply didn’t have access to practical and cost-effective means for hedging foreign-exchange risk earlier.” Options contracts signal investors have turned more optimistic on the rupee. The premium paid for options offering protection against possible declines in the currency in a month declined to 180 basis points today from 220 on Nov. 30, data compiled by Bloomberg show. ‘Exceeded Expectations’ The so-called risk-reversal rate was 150 for Russia’s ruble and 315 basis points for Brazil’s real. The measure for China was at negative five basis points, meaning investors are more bearish on the dollar than on the yuan. Exchange-rate futures have grown in popularity after companies in India suffered losses on customized derivative contracts as the credit crisis of 2008 fueled a surge in foreign-exchange swings. Hong Kong-based brokerage CLSA Ltd. estimated the same year that the nation’s firms would lose $4 billion on derivatives. Apart from the National Stock Exchange, rupee futures are traded on the Multi Commodity Exchange of India Ltd., the Bombay Stock Exchange and the three-month-old United Stock Exchange. The Mumbai-based bourses offer contracts for trading India’s currency against the dollar, the euro, the pound and the yen. “The growth in currency futures so far has exceeded all expectations,” National Stock Exchange’s Lahiri said. “Retail participation will increase with more awareness.” To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net. To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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