RBI's Intervention in ETCD Market: A Welcome Step towards Managing Rupee Volatility

Strategic Insights -

In a recent move, the Reserve Bank of India (RBI) has indicated its willingness to intervene in the exchange-traded currency derivatives (ETCD) market if required. This decision is seen as a welcome step towards managing rupee volatility, particularly in the short run. The RBI's intervention in the ETCD market is not unprecedented, as several other central banks from countries such as Brazil, China, and South Korea have already taken similar measures.

Key Takeaways:

  • The RBI's notification on intervening in the ETCD market is a response to the increasing volumes created by speculators in this market, which have a significant impact on rupee volatility.
  • The ETCD market in India includes futures in four currency pairs and options only in dollar-rupee (USD-INR), and it was introduced to facilitate businesses by providing hedging facilities.
  • Research conducted by the authors suggests that volumes in the futures markets do have an impact on the prices of the corresponding cash market, in both the equity as well as the currency segments of the market in India.
  • The RBI's intervention in the ETCD market sends a signal that central bankers will continue to expand their arsenal by using increasingly unorthodox tools if required.
  • The RBI will use the intervention as a tool to stabilize rupee volatility in the short run to maintain orderly conditions in the market, including liquidity conditions in the economy.

Statistics:

  • The rupee slipped from 56.57 against the dollar on 3 June 2013 to a low of 68.31 on 28 August 2013.
  • The volume of currency futures trading in the market during June 2013 was 34.5 million contracts (Chart 1).
  • The rupee sharply depreciated from 63.759 against the dollar to 66.709 during 10-25 August (chart 2).
  • The peak volume of currency futures trading on 25 August was 60% of the volumes on 20 June 2013.
  • Research conducted by the authors suggests that high volatility in currency markets and outlier futures volume (measured by distance to mean volume) coincide (chart 3).

Sources:

  • "Bank for International Settlements' paper No. 24-Foreign exchange market intervention in emerging markets: motives, techniques and implications-" (no date mentioned).
  • "Research conducted by the authors suggests..." (no specific source mentioned).
  • Reserve Bank of India (RBI).
  • Livemint (http://www.livemint.com).
  • HT Syndication (with permission from MINT).
  • SyndiGate Media Inc. (Syndigate.info).