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RBI influence in Forex may decrease with FIIs in currency futures
Thursday, September 25, 2008

The Securities and Exchange Board of India's (Sebi) proposal to allow foreign institutional investors (FIIs) in currency futures trading may curtail the Reserve Bank of India's (RBI) ability to intervene in the foreign exchange market. This has created tension in the market. "FIIs' entry into currency futures trading can curtail RBIs ability to intervene in the foreign exchange market," said Clearing Corporation of India (CCIL) Chairman R H Patil. All currency forward contracts with a daily volume of $35-40 billion are settled by CCIL.

If FIIs would be allowed in the currency futures market, then the country should be ready for investors like George Soros, added Patil. In 1992, George Soros had sold the pound in a big way in the UK's currency futures market by only paying the margin. This had led to a plunge in the British currency, forcing the Bank of England (BoE) to buy all the pounds to support the currency, thereby forcing the UK's central bank to spend a lot of money. The move ultimately led BoE to give up the fixed rate for the pound and go for a free float. India is certainly not prepared for such eventualities, said Patil, suggesting: "If FIIs have to be allowed, there should then be a cap on their open interest position in currency futures."Since there is no need for an underlying exposure in the currency futures market as in the case of currency forwards, FIIs and hedge funds may take one-sided positions and make life difficult for the central bank.

 

 

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