Riding the Rise of the Indian Rupee

Indian Rupee

 

CME Group has announced the launch of new foreign exchange futures contracts based on the Indian Rupee (INR), which will begin trading January 28, 2013. The launch completes our suite of BRIC currencies – Brazil, Russia, India and China – allowing market participants optimal risk management in these markets.

India is a market that has been growing tremendously in the past few years.  With that, we have seen an increased interest from market participants in access to the Indian Rupee and other fast-growing emerging currencies.  There exists a USD/INR over-the-counter offering, but the new contracts provide an opportunity to trade in both a standard-sized contract with a notional amount of five million rupees and a e-micro contact one-fifth the size of the standard-sized contract. We believe the two contract sizes will bring about greater precision for hedging currency risk and enhanced trading flexibility.

The overall Indian Rupee market is around $25.5 billion (USD) per day, a growth of 42 percent during the past two years, according to the 2010 BIS Triennial Central Bank Survey.  The Rupee, like most currencies of export-oriented Asian countries, will likely be the beneficiary of global reflation and rebalancing.  Moreover, the India market was recently encouraged by structural reform efforts that have provided it with good prospects for a steadily appreciating currency.

There are however some headwinds for the Indian Rupee.  Many traders and economists feel that the scope of sustainable gains will be cut short by India’s relatively large current account deficit of close to $16.4 billion (USD) in the second quarter of 2012, and India is the only country in Asia with a current account deficit.  In addition, inflation has remained high at an elevated level of 9.75 percent. All these factors will serve as a drag on the appreciation of the Indian Rupee, especially during periods of risk aversion.

CME Group chief economist Blu Putnam explains some of the reasons for the high-inflation levels in his recent report on emerging market currencies:

“While India appears to have amazing long-term potential, many observers see its heavy-handed bureaucracy, capital restrictions, and currency controls as being a drag on economic growth while making the control of domestic inflation extremely hard. From a “Volatility Box” perspective, India has typically chosen to control its short-term interest rate as a key tool for managing inflation expectations, while allowing the Indian rupee to absorb the volatility. This has been on display recently, as the Indian rupee has declined in value relative to the US dollar due to concerns over India’s policy toward foreign investment as well as rising inflation pressures.”

 

The other school of thought however is holding on to the idea that the Indian Rupee has already depreciated over 20 percent in over the past two years and many say that it has reached fair value.  With opposing views on how the Indian Rupee market will trade, one can be sure that having an efficient, transparent and liquid venue to trade the currency would provide effective risk management solutions for traders and hedgers in a dynamic economic environment.

About the Author

KC Lam is executive director of FX products at CME Group.

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