Derivatives houses in Mumbai, including JPMorgan and Citibank, are predicting a liquid foreign exchange options market will develop within a year. Ravi Bai, chief dealer at HDFC Bank in Mumbai, said daily volumes could possibly exceed USD70 million by year-end. In contrast a trader at BNP Paribas in Singapore noted that daily trading volumes for Singapore dollar/U.S. dollar options average around USD100 million.
And JM Capital Management, which has INR12 billion (USD245 million) under management, is one institutional investor that is eager to start using the instruments for hedging. Chandran Besai, head of equity in Mumbai, said it will start investing in the overseas bond market once it can use foreign exchange options to hedge currency exposure. The asset manager, which currently invests exclusively in domestic fixed income and equities, could allocate up to INR6 billion in foreign currency-denominated bonds.
The development of the FX options market hinges on the Reserve Bank of India granting permission for the trades. T.C. Nair, chief general manager of the department of external investments and operations in Mumbai, said the central bank will allow the product, but declined comment on the timeframe. Bankers estimated it was a year away, based on their experiences in other developing markets and conversations with the regulator.
Currently, onshore corporates in India are permitted to use FX forwards and FX swaps to hedge their currency exposure.
Srinivasan Varadarajan, treasurer at JPMorgan in Mumbai, said, "It will happen in a phased manner." But he predicted it would take a year before there are significant volumes. However, he said it was too early to tell if the bank will train existing staff for the products or hire new staff. However, the products will have their own trading book.
"This will be a very favorable development," enthused an official at Citibank in Mumbai, adding that it would become an active market maker.
