The beginning of exchange-traded rupee futures in India is a boon for Indian companies sitting on piles of green derivative papers. Whether the opening up of trading in futures through exchanges to speculators, arbitrageurs and noise traders is a boon or a bane for the real hedgers, time alone will tell.

The current currency derivative market in India has been buoyant with a no efficient price mechanism. Having no recognition by the exchange, except in the OTC space, it has been flourishing at the mercy of the corporate treasuries having foreign exchange exposures, companies with non-rupee revenue sources and speculators. Banks act as mediators to the buyers and sellers in the foreign exchange currency market as they occupy the supreme monopoly in this blue ocean. At present, in the absence of currency futures on indian exchanges, companies hedge their currency risk through forward deals with banks where they agree to sell/buy the dollar at a future date at a predefined exchange rate or swap their foreign exchange cash flows with those in rupees. Such contracts being privy to the contracting parties have led to haywire manipulations and limited participation resulting in skewed prices. Non-availability of this much-needed instrument to many has hit most of the small players having foreign exchange exposures who have had no means to cover their losses incurred for no fault of theirs.

As per Manoj Anand's—IIM Professor, Lucknow and K P Koushik—Independent, research on motivations for use of foreign currency derivatives in India. `The major objective is hedging the risk (96.1% responded as rank one objective), for arbitrage purpose (55.3% assigned rank two) and price discovery (36.4% assigned rank two and 33.3% assigned rank three).' The speculation as objective of using foreign currency derivatives is the least preferred option (62.1% assigned it as rank four). Apart from pure hedgers, currency futures also invite arbitrageurs, speculators and noise traders who may take a bet on exchange rate movements without an underlying or an economic exposure as a motivation for trading. Rupee forwards till date have been an important segment of the foreign exchange derivatives market in India. This market has experienced loads of action with enormous activity by corporates, exporters, importers, banks and FIIs.

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