After stock markets, bullion and commodities markets, India, is now gearing up for a newer investment asset class - currency futures. Considering the risk and uncertainty involved with volatility in foreign exchange rates, especially for the exporters, hedging in currency futures is now picking up pace among the investors.
Abhishek Goenka, Chief Executive Officer, India Forex Advisors, one of the leading forex advisory and management services in India, informed how Forex hedging can prove to be a potential asset class for investments. In a telephonic interaction with Rutam Vora of Commodity Online, Goenka maintained that with higher volatility in currency exchange rates, there is higher risk involved in investments, but looking at the return on investments from currency futures, it seems that new big thing in India's investment arena will be the Forex trading or currency futures.Excerpts:
Commodity Online: How much is the spread of Forex-trading in India and how much potential do you see?
Abhishek Goenka: India's Forex-trading business has a huge potential. Even though the participation from investors was not so significant till past few years, we have been successful in gaining rapid growth over past three-four years. The pace of growth in Currency Futures has been phenomenal with annual volume growth seen at a whopping 1500% year on year. While forex trading business has been age old in the US, in India, it has been fairly new. The gap can be seen of 25 years between the two countries with respect to forex trading business.
In India, we see investors from exporter communities, high net worth individuals (HNIs), corporate and speculators. Currently, we have reached to tire-2 level cities to tap the potential investors in India. But the penetration of this business will continue to progress in rest of the places over the due course of time.
CO: In India, there is less awareness about currency futures. How do you think you can popularize this among the potential investors?
Goenka: There have been consistent efforts taken up by way of awareness campaigns and seminars across the country. Even MCX is making strong efforts by arranging special training programs at different places so as to popularize the currency futures. I believe that in next 4-5 years, currency futures market will be at par with India's stock markets in volume terms.
CO: Currency futures market seems to be more expensive and involving greater knowledge about finance for investors. In this situation, what is there in store for retail investors?
Goenka: There has been low participation from retail investors till recently. Previously there was low liquidity in the market but now the liquidity seems to be improving with bigger players entering in to the fray. This platform will particularly help traders and exporters hedge dollar risk. Meanwhile, this also benefits small investors by offering higher rate on investments than other asset classes.
Meanwhile, the risk portion is also higher in currency futures trading. Currency hedge will have risk attached to it. And at times of turmoil, as volatility rises, so will be risk. Here needs a little bit of expertise to understand currencies and global economics.
According to me, the return on investments from currency futures should vary between 5-10% per month, provided that investments are made under strict disciplines.
CO: How investors can benefit from currency futures trading?
Goenka: Looking at the return on investments, there is huge potential for currency futures in the country. The only thing required is the expertise for understanding the currency movements, because it is extremely difficult to predict currency movements of more than two countries. If we consider trading in USD-INR, it is more practically feasible and possible, but trading in JPY-INR will require movements to be tracked from JPY-USD and then USD-INR. Though, GBP-INR, JPY-INR and EUR-INR are best for hedging purpose and most common among exporters. For trading purpose, USD-INR I find most suitable.
CO: How do you see emergence of newer exchanges for currency futures like United Stock Exchange etc?
Goenka: Presently, National Stock Exchange (NSE) and Multi Commodity Exchange (MCX)-SX are poplar exchanges for currency futures trading. As for other new exchanges, any new entrant in this field will take time to pick up the pace as the current daily trading volumes on these exchanges has been pegged at Rs.30,000 crore.
CO: There has been a debate on who is to regulate currency futures - SEBI or FMC as MCX falls under FMC, while NSE is regulated by SEBI?
Goenka: Essentially, currency futures need to be governed by SEBI, as FMC is a commodities markets' regulator. However, I am not yet sure on that.
CO: What is your role in currency futures market?
Goenka: We provide customized forex trading solutions to our clients, who are essentially corporate, HNI and retail. Presently, we provide financial portfolio management services. We also provide advisories on some select commodities like gold and crude oil etc. We have also set up a small broking desk and a desk for advisory.
CO: How do you plan to expand your operations in coming months?
Goenka: We have presently, four offices in India located in Mumbai, Delhi, Bangalore and Kolkata. Our set of team is making presentations and coordinating with exporters in smaller towns. We bring them to notice about the discrepancies in the rates that bank offer for Forex management. In order to bring awareness among the trading community, we interact with trade associations. We see huge potential in smaller towns in South India for currency futures. We plan to add at least 25-30 HNI clients to our portfolio every month. But our focus will be more on corporate clientele, which ranges from export turnover of Rs.60 crore to Rs.4000 crore. There are some 65 listed companies to our kitty.