beyondbrics

The renminbi might be a spotlight stealer, but it’s not the only restricted emerging market currency to have won attention lately.

Trade in an unusual Indian rupee/dollar future offered on a Dubai exchange had jumped over 1000 per cent this year as speculators and arbitrageurs take advantage of emerging market volatility and an increasingly liquid trade in that contract.

The Dubai Gold and Commodities Exchange is said to be the only exchange outside of India to offer regulated and cleared rupee/dollar futures—and, as Indian markets are closed to foreigners, Dubai is the only bourse they can trade the contract on. (Over the counter contracts known as non-deliverable futures exist, but are inaccessible to retail investors.)

On the DGCX, the number of Indian Rupee futures traded jumped to 130,995 this May, up 1,413 per cent year on year.

The market added new market makers recently, says Eric Hasham, chief executive of DGCX, to draw in more traders with improved bid-offer spreads.

May’s volume is actually lower than earlier in the year—March saw nearly 140,000 rupee contracts traded. Rupee volatility, which can create opportunities for arbitrage, has been falling since the Portuguese bailout, said Win Thin, currency strategist at Brown Brothers Harriman.

Derivative contracts have two functions. Traders can use the contract to lock in an exchange rate on goods they are sending cross-border effectively hedging their risk. Speculators can use the same derivative contracts to bet on the strength (or weakness) of the rupee. The different prices quoted for the futures contract in Dubai and on Indian markets let other investors profit from arbitraging the differential in the markets’ prices.

Brokers say most of the trade is driven by speculators and those arbitraging differencing in rupee prices on markets in India and Dubai. Although the subcontinent is Dubai’s main trading partner, businessmen hedging currency risk are so far a minority on the exchange.

Pankaj Gupta, regional manager for SMC Comex, a trading house, estimated that only 10 per cent of his clients were traders looking to hedge their rupee exposures, the rest both retail and institutional speculators and arbitrageurs.

Some of those arbitrageurs, he said, were not only playing the forex market, but were also using the contract to exploit differences in the rupee and dollar price of gold.

Pradeep Unni, chief trader at the brokerage Richcomm, said more businessmen were beginning to consider hedging on the market as its liquidity improved, but they still accounted for only one forth of his clients.

For now, brokers say the investors are mostly drawn from the UAE’s large population of Indian expatriates.

But internationally, speculators’ interest in emerging markets has pushed them to be creative about getting exposure to EM currencies, despite capital restrictions that make them difficult to trade, said Thin.

While the rupee contract on the Dubai exchange remains largely unknown and is still apparently dominated by investors in the UAE a few years after its launch, the more prominent offshore trade in Chinese renminbi has taken off recently.

“The rest of the world is looking for where to put their money and for great stories,” he said.

Related reading:
Lord Desai: forget the Renminbi, go for the Indian rupee, beyondbrics
Guest post: Rupee can serve as a reserve currency too, beyondbrics
Middle East file, beyondbrics