Indian Rupee Futures Volumes Decline Due to Lack of Arbitrage and Lackluster Price Action – TradingView News

A lack of arbitrage opportunities and little price movement are causing bankers to reduce their activities in the Indian rupee futures market, resulting in a decline in volumes.

According to CCIL data, interbank volumes in the dollar-rupee forward market fell 36 percent quarter-on-quarter during April-June, compared to a marginal increase during the same period last year.

According to CCIL data, interbank volumes in the dollar-rupee forward market fell 36 percent quarter-on-quarter during April-June, compared to a marginal increase during the same period last year.

The dollar-rupee forward premium market is used by companies to hedge their future foreign currency claims and payments. Banks have special departments to take care of the risk passed on by the companies.

Low arbitrage opportunities between the local OTC market and non-deliverable forwards against the backdrop of a fluctuating rupee and subdued volatility in forwards were largely responsible for the decline in volumes, bankers said.

“There is no momentum in the market and customer flows have decreased significantly (due to spot and forward contracts with fluctuating rates),” said Apurva Swarup, vice president of Shinhan Bank India.

The implied yield on the one-year dollar-rupee forward was in a range of 15 basis points (bps) in the April-June period, compared with a range of about 40 bps in the previous two quarters.

“When such small movements occur, banks’ risk appetite increases. This leads to them absorbing customer cash flows instead of channeling them to the market,” said a senior banker at a medium-sized foreign lending institution.

Trading in the futures market has shifted from “constant volumes” to “action zones” throughout the day, with market participants increasing their positions to make profits, he said.

The bid-ask spread in forward premium rates has narrowed as a result of the subdued price movement.

The current period of low volatility in rupee futures is setting the stage for a major breakout that could impact the dollar-rupee spot rate, a bank swap dealer said.

Trading activity could increase once the Federal Reserve begins cutting interest rates later this year, Swarup said.

Investors currently assume that the US Federal Reserve will begin cutting interest rates in September (FEDWATCH).