Dubai launches future contracts on Indian Rupees - Is RBI listening?

Dubai’s Gold and Commodity Exchange (DGCX) launched futures contract on Indian rupees and the volume crossed 23 million rupees on the second day itself. This is not surprising considering the strengthening of rupee against dollar by more than 13% in a year and possible volatility in rupee dollar exchange rate. Currency futures are required by FIIs to hedge their risks against an appreciating rupee against dollar. However none of the models or studies has proved conclusively any relation between exchange rate volatility and volumes of currency futures; and all provided mixed analytical results in for different markets.

DGCX is a joint venture between the Dubai Multi Commodities Center (DMCC) — Government of Dubai, Financial Technologies (India) and Multi Commodity Exchange of India (MCX). There are two interesting questions to be answered – why future contracts were offered on a foreign exchange and second, what challenge can Dubai pose in terms of international financial transactions.

The answer for the first question can be linked to the Reserve Bank of India’s (RBI) habit to intervene in any thing related to currency. Even the famous Mumbai IFC report recommended that RBI should stop intervening in securities markets. Though RBI has formed a committee to examine the impacts of introducing currency future on exchanges but chances are less that RBI will allow that at least in near future.

The second question is probably related to the quest of Dubai to become an international financial center. It opened in 2004 with an intension to become a link between Western Europe and East Asia. China and India are the two fastest growing economies in the world and with China’s market well serves by Hong Kong; it makes logical sense for Dubai to concentrate on Indian market. The emergence of Dubai as an IFC can seriously dampen the chances of Mumbai becoming an IFC and Indian government (& RBI) needs to act fast before it is too late.