Exchange-traded currency derivatives volumes are likely to drop in view of new Reserve Bank of India (RBI) rules, casting a cloud over further participation of retail investors and proprietary traders.
There are concerns that existing positions without any underlying exposure will need to be liquidated before Friday.
Also, weighed down by dollar demand from local oil companies and weakness in its Asian peers, the rupee on Wednesday ended at a new closing low of 83.44 versus the US currency.
The RBI issued a circular on January 5, 2024, effective from April 5, specifying that rupee-denominated currency contracts traded on the National Stock Exchange (NSE) and the BSE now require underlying exposure. Though traders are not required to provide evidence of underlying exposure for positions up to $100 million, they must confirm the existence of such exposure.
Currency futures transactions were primarily driven by the retail segment, which could not transact in over-the-counter (OTC) markets as banks typically demanded proof of underlying exposure. Retail trades account for over 60 per cent of total transactions and significantly contribute to overall liquidity on currency derivatives exchanges.
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