A lot of problems in the RBI's decisions: 1. Derivatives follow the underlying, not the vice versa. So USD INR derivative traders were betting on the direction of USD INR, they were not influencing it. Therefore the 'protect its turf' posture of RBI doesn't make sense 2. The market makers have already exited the market; a look at the volume would scream that there is no liquidity left even in near month contracts. Hedgers who are legally allowed to take positions do not have any counterparty to buy/sell the contract to. So they don't benefit either 3. INR will not be becoming international currency ever if this is how the Central Bank is going to govern it. Every major economy allows its currency to be freely traded. RBI is not even letting the derivative market to exist. 4. The illiquidity in the market makes it extremely unattractive for traders because of the wide spreads, not to mention the requirement of the underlying exposure to exist (even if evidence need not be produced, unless asked - in which case it must be produced). 5. The way a functioning market which worked for 14 years was destabilized shows the pathetic and myopic vision of the bureaucrats at RBI. Either they are simply inept to have allowed FEMA violation for over a decade by market participants, or they are incredibly dumb to disrupt the market in such a hasty fashion. One of the possibility has to be true. They should pick.
PS: Interestingly, cross currency pairs can still be legally traded on NSE/BSE without any underlying but the volumes in these pairs have always been meagre.
A lot of problems in the RBI's decisions: 1. Derivatives follow the underlying, not the vice versa. So USD INR derivative traders were betting on the direction of USD INR, they were not influencing it. Therefore the 'protect its turf' posture of RBI doesn't make sense 2. The market makers have already exited the market; a look at the volume would scream that there is no liquidity left even in near month contracts. Hedgers who are legally allowed to take positions do not have any counterparty to buy/sell the contract to. So they don't benefit either 3. INR will not be becoming international currency ever if this is how the Central Bank is going to govern it. Every major economy allows its currency to be freely traded. RBI is not even letting the derivative market to exist. 4. The illiquidity in the market makes it extremely unattractive for traders because of the wide spreads, not to mention the requirement of the underlying exposure to exist (even if evidence need not be produced, unless asked - in which case it must be produced). 5. The way a functioning market which worked for 14 years was destabilized shows the pathetic and myopic vision of the bureaucrats at RBI. Either they are simply inept to have allowed FEMA violation for over a decade by market participants, or they are incredibly dumb to disrupt the market in such a hasty fashion. One of the possibility has to be true. They should pick.
PS: Interestingly, cross currency pairs can still be legally traded on NSE/BSE without any underlying but the volumes in these pairs have always been meagre.
- From an erstwhile currency derivatives trader