Punting On Rupee: Rupee to Globalise Soon.

Global currency markets now dwarf almost every other market. Most authoritative source on FX market activity is the triennial survey by Bank of International Settlement [BIS]. In its last survey done in 2010, it had put foreign exchange average activity equivalent to US$ 4 trillion daily. It was estimated to have risen to US$ 4.7 trillion by October 2011
Private and public actors participate in FX trading for variety of reasons. University of California, Santa Barbara, study gives following table outlining the motives of both sets of actors for currency intervention. 
But this doesn’t even begin to tell the real story. The world merchandise trade [import or export] in 2011 across all product categories was put at US$ 26547 billion dollars. The world services trade [import or export] amounted to US$ 4192 billion dollars in the same year [Source: WTO statistics]. Together the total world trade per annum amounted to 30739 billion dollars in 2011. Compare this with US$ 4700 billion dollars played with in FX markets daily. Just 7 days turnover of FX trading exceeds the yearly world trade. Something much more monstrous than what is purely accounted for by world trade is obviously on. Even taking world FDI inflows that would create need for FX transactions doesn’t help. In 2011, like in earlier years, USA topped the FDI inflows table at US$ 234 billion, closely followed by China at US$ 229 billion; and together they accounted for 24% of total inward FDI. That gives an inward world FDI for 2011 of US$ 1930 billion dollars. That is peanuts in terms of FX trading, less than half a day’s job to account for a full year of FDI. What then accounts for this colossal difference? 
Speculation!! A more roundabout answer would be Financialisation of global economy. Currencies are in fact treated like any other commodity, whose exchange values  are open to speculation. But a *respectable answer* would assert that FX trading provides much needed liquidity and stability; and thereby minimise risks of currency movements for all stakeholders.This is the smokescreen behind which hides the Casino of currency speculators. Don’t believe? US National Bureau of Economic Research found ^^despite the global currency market’s massive size and abundant liquidity – attributes that should make it “efficient” in the economic sense – inefficiencies occur regularly, providing opportunities for computer-driven trading systems to turn a profit virtually risk free^^. The author adds for effect,^^There’s still “free lunch” in foreign exchange, but algorithmic traders are increasingly eating it faster than the rest of the market.^^. What it means is that the old economic wisdom of currency is a Store of Value, Unit of Measure and Medium of Exchange has turned into pure bullshit. Currency has become commodity, which is speculated freely by endless leveraging. The system doesn’t minimise risk, but instead puts risk sky high on steroids.
It is in this background one needs to evaluate the following news in Economic Times: ^^Five years ago, Dubai floated a new betting platform that allowed rich investors to punt on the value of the rupee, an exotic currency that was not traded outside India. India’s reaction was predictable. The central bank, which, under the law, has the last word on the rupee, asked Dubai to step back. The Emirates, in its customary style, disregarded it like one of those extradition requests and, in due course, the opening bell was rung to herald the trading of a dollar-rupee futures contract….Well, it doesn’t. But Indian authorities will find it difficult to scoff at offshore trades if betting happens on a different scale. From next year, rupee-dollar futures will be traded on ICE, one of the largest American bourses, and on Singapore Mercantile Exchange. It’s a matter of time before the Chicago-based CME, the world’s largest derivatives exchange and an arch rival of ICE, launches a similar contract….We often don’t realize that the rupee can be a sought after product with most serious global investors and MNCs either having or planning to have exposure to India; all of them are looking for easier and less expensive ways to hedge. If the rupee-dollar futures contract catches on – and there are reasons to believe that it could – the offshore market for dollar-rupee could in a few years become double or even three times the foreign currency market in India. Will we still ignore it? Will a larger offshore market make RBI’s job more difficult, and intervention in the forex market less effective and more expensive?^^.
The highlighted portion again shows the naivety about the beast called FX market. If this warming sounds overly dramatic, then remember what George Soros did in the September of 1992: ^^George Soros gained international notoriety when, in September of 1992, he risked $10 billion on a single currency speculation when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was reported that his profit on the transaction almost reached $2 billion. As a result, he is famously known as the “the man who broke the Bank of England.”^^. Or what happened during the meltdown of South East Asian economies towards the end of last century When the sea is calm, it appears harmless. When it turns turbulent it claims lives. Currency markets are like an ocean. When turbulence comes FX markets can consume nations.
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One Response to “Punting On Rupee: Rupee to Globalise Soon.”

  1. Doubter Says:

    RBI may allow FII entry in currency futures marketReserve Bank of India (RBI) is contemplating to allow foreign institutional investors (FIIs) in currency futures market, Deputy Governor H R Khan said today."We are thinking whether FIIs can participate in currency futures," Khan said while speaking at a seminar on capital markets organised by industry body CII here.He said the RBI is also mulling allowing a repo in certificate of deposits (CDs) issued by banks and commercial papers (CPs) by corporates.

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