The Finance Minister dedicated to the financial services community, a new product - Currency Futures on 29th August, 2008. And ever since, Ajay Shah is busy on the NSE web page with its live display of currency futures.

Finance Minister inaugurates the Currency Futures on 29^th August, 2008

It's a proud day today and I stand before you to dedicate to the financial services community, a new product - Currency Futures. May I begin by warmly thanking the Reserve Bank of India and Securities Exchange Board of India for jointly developing this product and I congratulate the National Stock Exchange for having the distinction of being the first exchange to commence its trade. I wish all success to NSE and I am hopeful that the other two exchanges which have received in-principle approval and other exchanges will soon offer this product.

I see before me on the screen the first trades that is being put through. I am not a trader and I can't qualify ever to become a trader, but if it makes any sense and I am sure it does to a large number of you. Someone is buying at 43.8250 and someone is selling at 43.8400, hope one of them at least makes a profit.

We need to continue to innovate and improve in the design of financial products, its customer service as well as all India delivery. I hope this will be kept in mind when regulators review the next steps on the exchange traded futures markets. I urge them to move rapidly and with an open mind that are necessary in such situations. After having launched currency Futures we need to revitalize the exchange traded interest rate derivatives market. We need to offer exchange traded credit derivatives and we need to strengthen the corporate bond market. These three products are high on the priority list of government and I ask the co-operation and support of RBI and SEBI and others to move forward rapidly. These 3 markets are important (Bond, Currency and Derivatives), it is important that these markets develop rapidly in-order to attract domestic and foreign participation have vibrant trading in spot and derivatives, have healthy speculation and arbitrage to ensure liquidity.

As Shri. Bhave cautioned, some of these products are indeed complex. But the complexity of the products should not deter us from making a beginning. Everybody has a responsibility to explain the complexity of the products to the customers, so that the customers can chose the products that he or she desires. We need to draw the right lessons from developments around the world. We need to innovate, while the same time we need to ensure that the complexities are understood, the risks are mitigated and there is reward for those who are willing to take the risk.

As the Deputy Governor mentioned the foreign exchange market in India has acquired a distinct vibrancy as is evident from the range of products, participation, liquidity and turnover. According to figures with me, the average daily turnover in the foreign exchange market which was about 25.8 bn US $ during 2006-07 has increased to 48.1 bn US $ during 2007 - 08 reflecting large cross border trade and capital flows.

Finally, let me conclude by saying, the financial sector needs to be opened up to greater competition so as to be able to provide a world class financial services at competitive rates. We should work towards removal of entry barriers to domestic corporate player and foreign financial firms in all segments of the financial services industry.

The most successful parts of Indian finance, I may say, are those in which non institutional participants have taken a lead and engaged in healthy speculative price discovery. This large mass of retail participation in financial markets is a unique edge that India has when compared with other international financial markets. However, considering that we are striving to project Mumbai as an international financial centre, the capabilities and strength of institutional investors also need to be harnessed.

This class of investors, (the institutional investors) brings with it sophisticated analytical tools and quantitative techniques, pools of capital and helps link Indian finance with the rest of the world. Thus our strategy should be to remove constraints on the Institutional investors to allow them to reap the benefits of financial market innovations and in turn assist these markets with depth and liquidity.

Globalization, ladies and Gentlemen is no more a choice, it is an opportunity for developing countries. It is an inevitable reality for all countries of the world. Today international financial markets are becoming increasingly integrated. London and New York are the world's premiere financial centers. Closer home we see Singapore, Hong Kong and now more and more Dubai, playing the role in Asia. Where does that leave us? Where should we position ourselves? We have the potential in us to develop Mumbai as a great centre of international financial services.

 From Ajay Shah’s Blog

NSE hasn't setup intra-day data release for the currency futures market. I got impatient and setup something by myself, a Unix scripting solution that polls their website. I had this up and running by the afternoon, and managed to capture 1009 distinct observations of their `market-by-price' (`MBP') for the near month (September) contract yesterday (from 1:41 PM to 5 PM). NSE's term `market by price' or `MBP' pertains to the quantities available for both buy and sell at the best five prices. This is unprecedented transparency when compared with the history of currency trading in India. Today (3rd) I got around to looking at this data. This was Day 3 of the currency futures market, where trading had started on 29th August.

The time-series of the spread

For a frame of reference, by and large, the OTC market has a spread of Rs.0.0025 for quantities of $0.5 million, which corresponds to 500 contracts on the currency futures market. Now, the OTC market is an opaque market and customers get bad deals; the fact that there is a spread of Rs.0.0025 there doesn't mean that customers get such tight execution. Yet, it's a natural reference point for understanding where the exchange-traded product has come.

On the currency futures, the tick size is Rs.0.0025 so to attain the spread of the OTC market; the spread has to be one tick.

Conclusion

I think this market is quite ready for hedging/speculative customers doing quantities of 10-100 contracts (i.e. $10,000 to $100,000). This is a large audience and so there's plenty of action in store. The big milestone will be where someone will be able to toss in a single market order for 500 contracts ($0.5 million) and back-to-back do an arbitrage against the OTC market. When these trades begin, this market will quadruple in size, i.e. it will come in the list of NSE's top 10 underlyings of the day.