The decision comes amid the regulator’s commitment to the further liberalisation of the country’s derivatives market by allowing interest rate derivatives to be traded in the future.
The central bank said it approved the introduction of currency options “to expand the menu of tools for hedging currency risk”.
India’s second financial regulator, the Securities and Exchange Board of India, must finalise the details of the contract before Indian exchanges can list it.
When approved by SEBI, the option contracts will supplement India’s rupee/dollar, rupee/euro, rupee/pound and rupee/yen futures, which were first offered for trading in February.
Two Indian exchanges offer the currency futures: the Multi Commodity Exchange of India and the National Stock Exchange of India.
A Mumbai-based MCX spokesperson said the exchange is interested in offering the new contract if it is approved by SEBI.
An NSE spokesperson was not available for comment.
India’s currency derivatives have had good volumes since they were introduced, despite limited participation. Indian financial regulation states that currency derivatives are not allowed to be traded by firms based outside of India.
The SEBI and the RBI said exchanges will soon also be able to launch interest rate futures on five-year and two-year notional coupon bearing securities and 91-day Treasury Bills. They said that the RBI-SEBI Standing Technical Committee will work on finalising the details of the new contracts but gave no timetable for the release of contract specifications.
The new interest rate futures will supplement the already approved 10-year interest rate futures on Indian government bonds.
One Mumbai-based futures commission merchant executive welcomed the commitment to expand the exchange traded derivatives offerings.
Trading of India’s interest rate futures is permitted only by firms hedging basis risk exposure.
The RBI said it hopes to publish its final framework guidelines on the introduction of over-the-counter foreign exchange derivatives by the end of June, after it published a draft report in November 2009.
Colin Packham, Sydney, cpackham@fow.com