the current forex markets and the recent measures undertaken by reserve bank. bis central bankers ’ speeches availability of hedging instruments 10. the availability of hedging instruments was never a major concern for the indian forex markets. instruments such as forwards, swaps and options have been available to market participants since fera days with cross - currency options available from 1993. in the otc segment the last entry was that of fcy - inr rupee options way back in 2003. all the instruments have become well entrenched in the market with different segments of corporates showing preference for different instruments. 11. the recent entrant into the market, currency futures in 2008, has not only generated a good bit of interest from participants but also queered the pitch a bit on account of the different regulatory environment it has been subjected to. first launched on nse it was subsequently available on two other exchanges ( mcx & use ). european style option on usd - inr pairs was launched on nse and use in october 2010. while presence of an underlying exposure is an essential requirement in the otc segment, no such requirement is in place for the exchange traded derivatives segment. this has created two different markets for the same underlying currency pair namely usd - inr. on account of having a sub - set of participants common to both the markets, the volatility of one market gets imposed on the other. to deal with this, even if partially, position limits of banks were revised on exposures to exchange traded products. liquidity in the market 12. as far as liquidity in the forex markets is concerned, the turnover in the markets has increased many fold during the last ten years and bid - offer spreads have narrowed considerably in the same period. this not only reflects the substantial increase in global trade and financial interaction with the outside world but also the increasing awareness of the corporates to foreign exchange risk and use of derivatives in managing such risks. the forward markets in india also are very liquid up to one year. the only concern in the market being the liquidity of the long term forward market beyond say one year or two year. however, this concern can be negated practically by rolling over a short - term ( say one year ) contract till the maturity of the exposure which basically replaces the volatility risk of the spot exchange rate with the volatility risk of forward premia which is confined to a far narrower range. 13. the liquidity took a

##ersing the same intra - day. while undertaking a hedge in a volatile market stands to reason, reversing it on the same day does not in any way reflect the medium to long term view of the corporate. it will be well appreciated by this discerning audience that any position undertaken to take advantage of the one way movement intensifies the move adding to the demand / supply pressures in the market. while it is well appreciated when the move reflects the hedging intention of the corporate, it does not augur well for the market volatility if the same is undertaken to speculate on the market movements. • it is a well known fact that given the rupee ’ s strength in recent history ( though not very recent ), indian importers generally stay unhedged or have a very small hedge ratio. even corporates who have both import and export exposures prefer to have their import exposures unhedged while almost fully utilising their export exposures. the same approach is followed in case of probable exposures also. in the current depreciating trend of rupee, these excess unutilised limits are a cause of concern when used for speculation. • the past performance facility was made available to corporates in addition to the facility based on actual exposures so as to allow them to plan ahead for managing their foreign currency exposures. both facilities together amounted to almost double the exposures of the corporates and without any delivery mandate on either could be / were used for speculative purpose. does it really constrain the corporates in managing forex risk or were the leeway given earlier enhancing the volatility and being misutilised? 17. let me emphasise here that the facility of rolling over the transactions continue to be in place to provide the corporate flexibility to alter the tenor of the hedge depending on the liquidity of the tenor, view on the forward premia, availability of pricing and also to match the tenor of the transaction to that of the underlying exposure in case delayed payments, uncertain maturity date ( for ex. in case of past performance ) etc. 18. hence, although the restrictions imposed take away certain leeway provided in managing the forex risk, it in no way restricts the ability of the corporate to do so. in a manner of speaking, it only takes away the additional volatility that the p & l of the corporate was subject to on account of forex trading. bis central bankers ’