Harun R Khan: Indian foreign exchange market - recent developments
and the road ahead
Inaugural address by Mr Harun R Khan, Deputy Governor of the Reserve Bank of India, at
the 25th Annual Forex Assembly, organized by the Forex Association of India (FAI),
Gurgaon, 4 October 2014.
* * *
Accompanying box can be found at the end of the speech.
The speaker acknowledges contributions of Shri Sudarsana Sahoo, Shri Anand Prakash & Shri Surajit Bose of
the Reserve Bank of India.
1. It is indeed a pleasure to address the trading professionals in the Indian foreign exchange
market at the Forex Association of India's 25th Annual Forex Assembly. The emerging and
enchanting city of Gurgaon provides the right backdrop for holding such a conference as this
city epitomizes phenomenal growth and development symbolizing the best of "Made in India"
and "Make in India" and in a similar vein the Indian forex market has also witnessed
tremendous growth and development in terms of depth and breadth, particularly since the
adoption of market determined exchange rate regime about two decades ago.
2. The exchange rate of Rupee has witnessed both periods of intense volatility and periods
of stability since May 2013 when the Fed Chairman Bernanke first hinted at early tapering of
Fed's Quantitative Easing (QE) programme. Against this backdrop, I would like to start my
address by briefly touching upon the developments in the domestic forex market, especially
after Chairman Bernanke's testimony, and the measures taken by the RBI to restore orderly
conditions in the market. Then I would also like to focus on the possible risks to the stability
of the forex market going forward and how well is India placed now as compared to 2008 and
2013 to cope with large capital outflows if they were to materialize. Finally, I will discuss
some of the major issues and concerns pertaining to the Indian forex market which are
presently engaging the attention of the policy makers.
Developments in the forex market
3. In the aftermath of the global financial crisis and the Eurozone debt crisis, EMEs including
India faced enhanced uncertainty, especially in the external sector on the back of both local
and global developments. The worsening of India's external environment was amply
reflected in the deterioration in various external sector vulnerability indicators between
endMarch 2011 and end-March 2013.The external debt to GDP ratio increased from 18.2 per
cent to 22.0 per cent. On the other hand, the import cover of reserves, which stood at 9.5
months at end-March 2011 declined sharply to about 7.0 months at end-March 2013. The
CAD-GDP ratio deteriorated from 2.8 per cent to 4.7 per cent during the period. The weak
macroeconomic environment was reflected in the form of sharp deceleration in GDP growth
rate (4.5 per cent in 2012-13 and 4.4 per cent in Q1 of 2013-14), high level of inflation
(average WPI inflation of 7.4 per cent in 2012-13) and large fiscal deficit (4.8 per cent of GDP
in 2012-13).
4. Though the trigger or the proximate cause for intense volatility witnessed in the domestic
forex market during the period May-August 2013 was the heightened concerns about the
possibility of early QE tapering, the more important cause was the existence of such weak
macro-economic fundamentals. The possibility of early tapering of QE programme by the US
Fed triggered large selloffs by the FIIs, especially in the bond market leading to heightened
volatility of Rupee in line with other EME currencies. The hardening of long-term bond yields
in the US and other advanced economies increased their attractiveness, prompting foreign
investors to pull funds out of riskier emerging markets, which had received large capital
inflows in search of higher yields. The Indian Rupee became one of the worst performers
during the period from the second half of May 2013 to August 2013. Rupee depreciated
sharply by around 19.4 per cent against the US dollar from the level of 55.4 per US dollar on
May 22, 2013 to a historic low of 68.85 per US dollar on August 28, 2013.
5. To stem the sharp and substantial depreciation of the Rupee, policy makers resorted to a
mix of policy measures including forex market intervention, monetary tightening through
reduction in banks' access to overnight LAF, increase in MSF rate and increase in daily
minimum CRR maintenance requirements and administrative measures, such as, import
compression of non-essential items like gold, opening of special dollar swap window for the
PSU oil companies, special concessional swap window for attracting FCNR (B) deposits,
increase in overseas borrowing limit of banks, bringing of outward FDI flows to the approval
route, reduction in Liberalised Remittance Scheme (LRS) entitlement, disallowing banks from
carrying proprietary trading in exchange traded derivatives, etc. The Reserve Bank made net
sales to the tune of US$ 10.8 billion in the forex market during the period May-August 2013.
The Reserve Bank also intervened in the forward market resulting in doubling of net forward
liabilities to US$ 9.1 billion as at end-August 2013 from US$ 4.7 billion in July 2013. Apart
from monetary and administrative measures, the flow encouraging measures, such as,
enhancement of FII investment limit in government debt by US$ 5 billion to US$ 30 billion
was undertaken in June 2013.
6. The special forex swap facilities extended by the Reserve Bank at concessional rate for
fresh longer term FCNR (B) deposits and banks' overseas borrowings along with
enhancement in their overseas borrowing limits led to forex inflows in excess of US$ 34
billion that aided in restoring stability of the Rupee. The Reserve Bank undertook the
concessional swap facility as an exceptional measure with the broader public policy objective
of bolstering the forex reserves for strengthening Bank's market intervention capability.
Similarly, the swap windows to meet oil demand were conceived as a purely temporary dollar
lending arrangement to OMCs. The swap window did attract a fair amount of criticism from
the perspective of execution of the second leg but thankfully the Reserve Bank can look back
at these temporary arrangements with a sense of satisfaction of restoring confidence and
stability in the foreign exchange market and India's external sector outlook.
7. Alongside, various measures taken by the Reserve Bank and the Government of India
including the fiscal steps taken to compress gold demand helped in stabilizing the financial
markets, in general, and the forex market, in particular through sharp reduction in CAD and
increase in capital inflows. Consequently, the Rupee made a smart recovery in
SeptemberOctober 2013. With the return of stability in the forex market, a calibrated unwinding of
exceptional monetary and administrative measures of July 2013 was undertaken from
September 2013 onwards.
8. Despite the announcement on December 18, 2013 of commencement of tapering by the
US Fed starting from January 2014 and the subsequent announcements about the increase
in its pace, the Rupee has generally remained stable, which indicates that the markets have
broadly shrugged off QE tapering fears. The Rupee has remained relatively stable as
compared to other major EME currencies like Brazilian Real, Turkish Lira South African
Rand, Indonesian Rupiah and Russian Rouble. The daily volatility (annualised) of Rupee
during the period from January 1 to September 30, 2014 remained at 5.9 per cent as against
South African Rand (11.5 per cent), Brazilian Real (10.8 per cent), Turkish Lira (10.6 per
cent), Russian Rouble (9.9 per cent) and Indonesian Rupiah (6.9 per cent). In terms of
pointto-point variation, Rupee has marginally appreciated by about 0.5 per cent during the above
period, while other currencies have witnessed depreciation, viz. Russian Rouble (16.9 per
cent depreciation), South African Rand (7.4 per cent), Turkish Lira (5.8 per cent) and
Brazilian Real (3.4 per cent).The contagion effect of sharp fall in Argentine Peso against the
US dollar in the second half of January 2014 also did not have any major impact on the
Rupee. Even the recent geo political crises in Ukraine, Iraq and Gaza did not have any
significant impact on the Indian financial markets. This has led to some analysts describing
Indian Rupee as the most agile out of the fragile currencies of EMEs.
9. The fact that weak macroeconomic fundamentals have a tendency to accentuate the
contagion effect of any adverse external development was amply demonstrated during the
May-August 2013 episode of volatility. Countries with large macroeconomic imbalances,
especially large CAD, such as, Brazil, Turkey, India, Indonesia, etc., experienced much
larger volatility as compared to other EDMEs with current account surplus/better
fundamentals. In a scenario of intense volatility, traditional monetary policy defence at times
proves inadequate as was experienced by other EDMEs like Turkey and Indonesia. Thus, a
mix of measures, including administrative measures, coupled with effective communication
by central banks helps in containing the exchange rate volatility. I feel that the main lesson
from this episode of volatility for an EMDE central bank is to have sufficient tools in its toolkit
and employ them in a flexible, proactive and pragmatic manner. In this context, having large
forex reserves, which was earlier considered wasteful on account of quasi fiscal costs, has
become a new virtue. Even the debate surrounding capital account liberalisation has
decisively veered towards having some necessary capital controls in place to protect the
EMDEs from the vagaries of international capital flows where a deluge is generally followed
by sudden stops. The need for the EMDEs to have prudent capital controls in place has been
duly recognised by the ardent votaries of full capital account liberalisation like the IMF.
Unfettered capital account liberalisation is now passé and the new mantra is having certain
necessary capital controls in place and use them proactively during episodes of heightened
volatility.
10. As regards the movement of Rupee during the recent period, it has remained largely
range-bound with strengthening bias on the back of sustained capital inflows and improving
macroeconomic fundamentals. In a comparative sense in Q2 of 2014-15, the Indian Rupee
depreciated 2.72 per cent against the US dollar while the Russian Rouble depreciated about
13 per cent, Turkish Lira by 6.5 per cent, the Brazilian Real by 10 per cent, and the South
African Rand by 5.5 per cent. There has been continuing FII inflows to the domestic equity
markets as well as resumption of FII inflows to debt market, especially since December 2013
(except in April 2014 when there was a net outflow). During 2014 so far, foreign portfolio
inflows to debt and equity markets have been around US$ 34 billion with the larger part going
to the debt segments. The substantial reduction in gold imports and increase in exports led to
significant reduction in current account deficit to 1.7 per cent of GDP in Q1 2014-15 from
4.8 per cent in Q1 2013-14. In the recent period, inflation has decelerated (7.8 per cent CPI
inflation in August 2014), growth has picked up (5.7 per cent in Q1 of 2014-15 as compared
to 4.7 per cent in Q1 of previous year), fiscal deficit has reduced (4.5 per cent of GDP during
2013-14). India's forex reserves have increased by around US$ 40.3 billion in the past one
year to around US$ 316 billion as on September 12, 2014.While the country's external debt
may have risen to 1.8 per cent for the quarter ended June 2014, the share of short-term debt
in the total debt has declined primarily due to restrictions on FII investments in the short end
of the G-sec. It is equally important to note that short term debt as a percentage of reserves
have also declined largely due to increase in the size of foreign exchange reserves. The
sharp increase in forex reserves and improvement in macroeconomic fundamentals,
including the short-term debt profile, have significantly enhanced the resilience of the
economy to external shocks. Political stability in terms of formation of a new Government
with clear mandate, Government's continued commitment to fiscal consolidation and
sustained decline in oil prices have boosted the confidence in the country's macro-economy.
The recent upgrade in country's outlook from negative to stable by S & P in a sense reflects
and reinforces this new confidence. Thus, it can be said that India is in a much better position
to withstand large capital outflows triggered by external developments. We, however, have to
be alive to a few downside risks.
Downside risks
11. Downside risks in the form of still elevated retail inflation, continued weak economic
performance, uncertainty surrounding global economic recovery, potential slowdown of
capital flows to EMEs once interest rate cycle in advanced economies reverses, geopolitical
risks, etc., remain. We need to be particularly cautious of the likely impact of headwinds
arising due to growing robustness in the growth outlook of the US and the strengthening of
the US dollar and the dovish stance of the European Central Bank. These can cause
problems to India's external sector. Additionally; the recent surge in equity markets has
created concerns about under-pricing of risks with attendant implications for financial
stability. Any abrupt correction of such risks may result in sharp fall in asset prices and
enhanced volatility in global financial markets, especially in the EMDEs. Moreover, as we
have seen while financial risk taking has gone up substantially, aided by accommodative
policies of central banks of AEs, economic risk taking in conspicuously absent or muted. This
has implications for global output growth and in turn trade growth trajectory; WTO, for
instance, has lowered its world trade growth forecast for 2014 from 4.7 in in April to 3.1 in
September. Further, though macro-economic fundamentals and business sentiments in the
country have improved during the recent period, more needs to be done in terms of removing
structural impediments, building durable business confidence and creating fiscal space to
support investments in order to secure sustainable growth. In the long-run, the resilience and
robustness of the macro-economy in conjunction with the depth, breadth and orderliness of
the financial markets will determine the stability of the external sector as well as the overall
financial sector.
12. Now I would like to turn to some of the major issues and concerns relating to the forex
market, which are currently engaging the attention of the policy makers and, I hope, also of
the market players.
Hedging of currency exposures by corporates
13. In the recent period, the global financial markets have been going through a phase of low
volatility and the Indian markets have been no exception to this trend. A supportive policy
environment backed by accommodative monetary policy stance of the central banks of the
advanced economies (AEs) and visible signs of pick-up in growth in some of the AEs have
contributed, in a large measure, to reduction in volatility. On the flip side in India, there is
emerging anecdotal evidence of reduced propensity to hedge foreign exchange exposures
arising out of a sense of complacency. The unhedged exposures in respect of External
Commercial Borrowings (ECBs)/ Foreign Currency Convertible Bonds (FCCBs) lead to large
scale currency mismatches in view of the bulk amount borrowed by domestic corporates for
longer tenors with limited or no natural hedges. Further, the increasing use of bond route for
overseas borrowings exposes the domestic borrowers to greater roll-over risk. As per
indicative data available with the Bank, the hedge ratio for ECBs/FCCBs declined sharply
from about 34 per cent in FY 2013-14 to 24 per cent during April-August, 2014 with very low
ratio of about 15 per cent in July-August 2014. Large scale currency mismatches could pose
serious threat to the financial stability in case exchange rate encounters sudden depreciation
pressure. It is absolutely essential that corporates should continue to be guided by sound
hedging policies and the financing banks factor the risk of unhedged exposures in their credit
assessment framework. Banks have expressed the difficulty faced by them in pricing the
unhedged exposures of the corporates in an environment of low pick up in credit growth.
Given the implications of large unhedged forex exposures on the financial stability, it is
necessary for the banking industry to act in unison to bring about an awareness amongst the
corporates about the need for adopting and implementing a well-deliberated hedging policy
so that the Indian forex market is spared of regular episodes of extreme volatility.
Foreign exchange derivatives - requirement of underlying exposure
14. The access to the OTC foreign exchange derivatives has been subject to production of
documentary evidence in support of the underlying exposure except for hedging of probable
exposures and special dispensations offered to SMEs, individuals and firms. The primary
objective of the regulation has been to restrict the use of OTC foreign exchange derivatives
by the corporate clients for hedging their exchange rate risks and not for trading in the
instruments. Trading in derivatives requires sophisticated risk management skills and
financial acumen which are not the natural strengths of corporate entities barring a few large
corporates who are into treasury operations as an independent profit centre. Further, the
trading activities of authorised dealer banks are subject to strict governance and regulatory
standards which the corporate entities even with sophisticated treasuries are not subjected
to. The exchange rate being an important macroeconomic variable, unregulated trading in it
has potential adverse consequences for macroeconomic and financial stability. The Reserve
Bank is aware of active intra-day/short term trading by some corporate houses in the foreign
exchange government securities market. In the past, the Reserve Bank has imposed
restrictions on cancellation and rebooking of forward contracts by the corporates so as to
curb their speculative trading that accentuates volatility of Rupee. As huge position taking by
the corporates has the potential of destabilizing the market, particularly during periods of
uncertainty, Reserve Bank would expect adherence to the spirit of its regulations by such
non-bank entities.
15. The Reserve Bank is fully aware of the need to put in place customer-friendly procedures
to encourage greater amount of hedging from the end-users. In the past, the bank has taken
several measures to simplify the documentation requirements for facilitating easy access to
foreign exchange derivatives; recently it has increased the limit of hedging without
documentation to US$ 250,000. The facility of hedging the probable exposures based on
past performance in respect of trades in merchandise goods and services has also provided
flexibility in hedging in the absence of underlying documents supporting contracted
exposures. The Reserve Bank had imposed certain restrictions in use of the past
performance based facility by the importers in the backdrop of heightened volatility in
exchange rate of Rupee last year. It has gradually removed the restrictions as the exchange
rate started trading in a stable manner. As announced in the latest Monetary Policy
statement of September 30, 2014, the eligible limit for importers under the past performance
route has been restored to hundred percent. Some of the other important relaxations are
listed in the Box.
16. There are difficulties involved in ensuring underlying verification in exchange traded
derivatives (ETCD). It would, however, be imprudent to apply asymmetric regulations for
OTC and exchange traded derivatives in respect of underlying requirements. The Reserve
Bank has attempted to draw a balance between these two aspects while prescribing the
latest regulations on participation of residents and foreign portfolio investors (FPIs) in
exchange traded derivatives. Going forward, the Bank could consider further measures to
simplify the documentation requirements.
Long term hedging - development of forward market beyond one year
17. The depth of Indian foreign exchange market has improved during the last one year with
average daily inter-bank spot and FX swaps (mainly used for covering forwards) trading
volume increased to US$ 8.7 billion and US$ 8.1 billion during August 2014 from
US$ 7.2 billion and US$ 7.1 billion respectively during August 2013. The limitation, however,
remains with the restricted spread of liquidity in the forward market which is mainly confined
upto one year. As per the data reported to Trade Repository at the Clearing Corporation of
India Ltd. (CCIL), the share of forwards beyond 1-year remains well below 1 per cent.
Nonavailability of long term forwards has often made hedging difficult, especially for exporters
and corporates availing of external commercial borrowings. They have to resort to rolling
over the short term forward contracts matching with the tenors of their underlying
receivables/payables. Such roll-overs pose price risk depending upon the magnitude of
variation in exchange rate at the time of roll-over. As you know, the development of long term
forward market greatly depends on the extent of development of interest rate markets at the
shorter end of the curve. A liquid term money market facilitates development of credible term
benchmark rates that help development of long term swap markets. The long term interest
rates guide the pricing of the long term forward contracts.
18. It has been a constant endeavour of the Reserve Bank to promote development of the
term money market. Some of the recent initiatives include introduction of term repos as a
part of Bank's liquidity operations, increasing the frequency of term repos to four times during
a reporting fortnight, recent announcement for permitting re-repoing of government
securities, etc. The market participants and the market representative bodies together have
to take initiatives in this regard that would pave the way for development of long term forward
market. Pending development of liquid term interest rate market, the active market
participants in the forward market should together try quoting in the tenors beyond one year.
As such, some banks trade in MIFOR (Mumbai Inter-bank Forward Offered Rate) wherein
they take a view on long term forwards as the price of instrument is a combination of USD
LIBOR and USD/INR forward premium of related tenors. They may take a lead role in
quoting the long term forward rates based on their views they take in quoting MIFOR. I am
confident that if 10 to 15 active banks take the initiatives, it may lead to decent liquidity in
long term forwards. I would also urge the foreign exchange broker community to play a
proactive role in this regard.
Enhancing liquidity in the OTC FX option market
19. It is quite disheartening to see that the trading activity in the option market has declined
drastically during the recent period. As per the data reported to the CCIL Trade Repository
(TR), the average daily volume in the inter-bank USD/INR option market remained at
US$190 million in August 2014, a fall of about 45 per cent from the levels two years back.
The average daily volume in the inter-bank USD/INR options is currently just about 2.6 per
cent of that of inter-bank USD/INR forwards. The decline in the inter-bank option trading
volume is attributed to fall in the usage of options by the clients as well as fall in the
proprietary trading by banks.
20. It is a well-recognised fact that the option contracts provide lot of flexibility to the end
users for hedging their currency exposures in cost effective ways. The plain vanilla option
contracts may be combined in various ways for reducing the cost of hedging. The Indian
currency option market needs to be rejuvenated to cater to the needs of various real sector
economic agents. As you are aware, the Reserve Bank in its latest Annual Report has
announced to expand the option market in the coming years to allow market participants to
hedge more easily and cheaply. Going forward, the Reserve Bank will actively engage with
the banks and other stakeholders in bringing out necessary regulatory changes to foster
promotion of liquidity in the option market. As an important step in this direction, we would
like market bodies like FAI/FEDAI to give us a well- deliberated feedback on the need to
allow corporates to write covered options and also take on simple structures like call-spreads
with appropriate safeguards.
FPI participation in the currency derivatives market
21. As you know, the Foreign Portfolio Investors (FPIs) were allowed to participate in the
exchange traded currency derivatives (ETCD) on June 20, 2014 for the purpose of hedging
the currency risk arising out of the market value of their exposure to Indian debt and equity
securities. The participation of FPIs in the ETCD has, however, remained muted so far with
open interest of about US$ 11 million as on September 30, 2014. The participation of FPIs in
the OTC currency derivatives also remained quite low. As announced in the Annual Report,
the Reserve Bank could consider further measures for extending access to the OTC
currency derivatives to the international stakeholders over the medium term.
FPI participation in the G-sec market
22. In the recent past, Reserve Bank had noticed trends of volatile FII flows in the short-term
debt market which were impacting the foreign exchange markets as well. In view of volatile
FII flows in the short term government securities market, the Reserve Bank restricted
FIIs/QFIs investments to only dated government securities having residual maturity of three
year or above. The overall G-sec investment limit, however, remained unchanged at
US$ 30 billion. The policy objective was two-fold (a) containing the interest rate and
exchange rate volatility and (b) developing the debt market by attracting long-term stable
investment flows through endowment funds, pension funds, sovereign wealth funds, etc. In
the meantime we have been smoothening the process and procedure relating to their
investments, e.g., direct participation in trading , introduction of T+2 settlement and possible
introduction of international settlement linked to domestic trading system. Going forward,
Reserve Bank would calibrate further liberalization of the FPI investment limits in G-sec with
the overall objective of prudential management of the capital account in general and
mitigating the impact of speculative carry forward trade in particular.
Reforms in the financial benchmarks
23. The Vijay Bhaskar Committee on Financial Benchmarks has recommended several
measures for strengthening the benchmark quality, setting methodology and governance
framework of the Indian interest rate and foreign exchange benchmarks respectively. The
Committee has recommended creation of an independent body by FIMMDA and FEDAI,
either independently or jointly, for administration of the Indian interest rate and foreign
exchange benchmarks so as to overcome the possible conflicts of interest with the
benchmark setting process arising out of their current governance structure. It is heartening
to note that the FIMMDA, FEDAI and IBA are in the process of forming an independent
company jointly. I urge the three institutions to expedite the process so that the new
company can take appropriate steps to implement the recommendations of the Committee at
the earliest and become compliant with the IOSCO Principles on Financial Benchmarks
already endorsed by the FSB working on the mandate from G-20.
24. As you know, based on the recommendations of Committee, the Reserve Bank has
issued guidelines on April 16, 2014 specifying measures to be implemented by the banks
and PDs acting as Benchmark Submitters for strengthening the governance framework for
submission. The guidelines also stipulate that the FIMMDA and FEDAI will select the
Benchmark Submitters on the basis of their standing, market-share in the
benchmark/instrument linked to the benchmark and representative character and will put in
place a Code of Conduct specifying various provisions including hierarchy of data inputs for
submissions. I came to know that the Code of Conduct and the list of submitters for various
interest rate and foreign benchmarks have been finalised. Reserve Bank would expect these
submitter banks, Indian and foreign, and PDs to extend necessary support and cooperation
for strengthening the benchmark determination process. The Benchmark Submitters selected
by the Administrator have to necessarily participate in the polling process as stipulated in our
guidelines.
OTC derivative data dissemination
25. In compliance to the G-20 commitment for creation of OTC derivative TR, the creation of
TR for various OTC foreign exchange derivatives was completed on December 30, 2013 with
roll-out of the fourth and final phase covering currency swaps, IRS in foreign currency and
client trades in Rupee IRS. The reporting platform for inter-bank Rupee IRS and CDS were
already in place. The Reserve Bank has announced in the latest Annual Report as part of its
agenda for 2014-15 to institute an appropriate public dissemination system at the CCIL for
disclosing the price and volume information relating to the major inter-bank OTC FX
derivatives, such as, FX forwards and options to be reported to the TR. The price and
volume dissemination will help promote greater market transparency and reduce information
asymmetry. The Bank has also earlier indicated the usage of the reported OTC derivative
transactions for its conduct of surveillance of OTC derivative markets, financial stability
assessments and micro-prudential supervision.
26. It came to our notice that there have been several instances of wrong and delayed
reporting of the transaction data to the TR. It must be appreciated that the correctness and
timeliness of data reported to the TR are the critical requirements for disseminating reliable
information to public and making use of the data for various regulatory purposes. RBI has
already advised the heads of the Treasury of the AD banks to put in place appropriate
system to report correct transaction data in the specified formats within the stipulated
timelines. I once again urge all the banks to strengthen their reporting system so that an
effective and comprehensive dissemination system can be put in place at the earliest as this
is in the interest of all the stakeholders.
Need for more number of FX trading platforms
27. The spot FX trading in India is mainly concentrated on a single trading platform with
minimal volume getting cleared on the second platform. An electronic trading platform is an
important market infrastructure which aids in efficient trade execution, price discovery and
post-trade settlement. The concentration of trading in a single platform has adverse
consequences for the stability and efficiency of the foreign exchange market. You may
remember that the largest global foreign exchange market making banks partnered in 1990
to create an alternate electronic platform when the trading was mostly concentrated in a
single platform. The existence of more than one trading platforms facilitates competition and
reduces cost of trading. Although a large number of trading platforms may fragment market
liquidity, a reasonable number of trading platforms in the Indian spot FX market with daily
trading volume of about US$ 8 billion will not adversely impact the liquidity. There are at least
two major platforms in the spot trading of many currencies. I would suggest that the FEDAI
and market participants may work together to promote competing trading platforms in the
overall interest of market stability and efficiency and reducing the cost of trading.
The way forward
28. The Indian foreign exchange market has come a long way in terms of variety of
instruments, participants and the overall market turnover. Liberalization in exchange controls,
simplification of operating procedures and introduction of several new instruments has
provided greater flexibility to the market participants in undertaking foreign exchange
operations and managing their currency risks. Given the growing size of India's presence in
international trade and finance, more of course needs to be done to make the market
broader, deeper and more vibrant. I have flagged certain proximate concerns and issues,
although the list is not exhaustive, for this gathering to ponder over I