knife to a gun fight

http://www.livemint.com/Politics/u8IOJknpiSTLP0BD9GOM6L/RBI-ready-to-intervene-in-exchangetraded-currency-derivativ.html

jpm says that $1.5 trillion in derivatives linked to the sp 500 $700 billion puts expire 2 days after the fed

the rbi understands that some of those derivatives are inevitably tied onshore or offshore exposure to indian capital markets (hard to handicap p notes, credit default swaps, and other just plain skullduggery in the trenches with boris in bermuda holding the promise to make market whole)

like bringing a knife to a gun fight

http://www.livemint.com/Politics/u8IOJknpiSTLP0BD9GOM6L/RBI-ready-to-intervene-in-exchangetraded-currency-derivativ.html

The Reserve Bank of India (RBI) is keeping its powder dry in anticipation of a US interest rate increase that the World Bank has warned may trigger a “perfect storm” in developing countries.

RBI said on Wednesday that it will step into the exchange-traded currency derivatives (ETCD) segment of the foreign exchange market, if required, to defend the rupee.

The disclosure is the first such by RBI, which has already been intervening in the spot currency market and the over-the-counter (OTC) cash and derivatives segments.

The Indian central bank’s announcement comes as the US Federal Reserve prepares for a meeting next week at which it is expected to hike interest rates in the world’s biggest economy for the first time in a decade. Global currency markets are expected to turn more volatile as the Fed begins hiking rates.

In September, the World Bank warned that monetary policy tightening by the Federal Reserve could usher in a “perfect storm” of threats to growth and financial stability in developing economies. Capital flows to developing economies could cease, it said.

RBI likely wants to quell speculative activity by verbally spelling out its intentions, said A.V. Rajwade, an independent foreign exchange expert.

The move was perhaps also driven by RBI’s concerns that speculative activity in the futures market could spill over to the OTC cash and derivatives segment of the currency market as well.

“The Reserve Bank of India intervenes in the domestic foreign exchange market as and when required in order to manage excessive volatility and to maintain orderly conditions in the market. As a further measure, it has been decided to intervene in the ETCD segment, if required,” RBI said in a statement without explaining the reasons behind the decision.

The ability to intervene in the exchange-traded market will help RBI prevent any speculation-driven volatility in the rupee, forex market experts say.

“Clearly they must believe that there is a strong interplay between the OTC and exchange-traded market,” said Jamal Mecklai, founder and chief executive of Mecklai Financial Services.

They probably expect the futures market to “exaggerate the rupee’s fall”, Rajwade said.

In its words, RBI intervenes in the foreign exchange market to curb excess volatility and not to fix any level of exchange rate. This was reiterated in Wednesday’s statement as well.

RBI’s move could be better understood if the rupee’s sharp depreciation episode of 2013 is considered. In May 2013 when the Fed first announced its intention to roll back quantitative easing, it triggered a flight of capital from emerging markets including India. Consequently, the Indian rupee weakened sharply and hit an all-time low of 68.85 per dollar in August that year.

During the rupee’s depreciation, a sharp rise in the volume of exchange-traded futures was seen.

On the National Stock Exchange, the average daily turnover of dollar/rupee futures doubled in two months, rising to about Rs.20,000 crore in May from about Rs.9,000 in January. RBI deputy governor H.R. Khan also agreed that speculative activity in futures could have influenced the rupee’s movement.

The measures give RBI “ample firepower” to defend the rupee, said another foreign exchange trader, adding that such interventions will have less impact on domestic liquidity than interventions in the spot market. When RBI intervenes to buy or sell dollars in the open market, its actions have a direct bearing on domestic liquidity by adding or impounding rupees from the system, respectively.

“This measure, which has been announced just before US FOMC (Federal Open Market Committee) decision and purportedly CNY (Chinese yuan) devaluation fear, give us reasons to believe that RBI may not allow sharp depreciation of the INR (Indian rupee) in the near future,” said the trader.

A divergent monetary policy stance across advanced economies is expected to create considerable volatility in global currency markets over the next few months. Traders have already build long-dollar positions in anticipation of the Fed’s lift-off, said two currency dealers. The rupee settled at 66.84 per dollar on Wednesday, a 27-month low.

“There is a direct linkage between the exchange-traded futures market and the OTC market. Overseas currency movements affect both,” said a second currency dealer. Average daily turnover of the futures market currently is around Rs.6,000 crore.

An internal study by RBI in December 2013 said there was a strong interplay between the onshore and offshore OTC currency derivatives market, especially in times of depreciating bias on the rupee. The study, however, did not mention any linkages with exchange-traded products.

Forex experts, however, said that while bringing the exchange-traded products under its intervention would ensure order in the exchange rate, it would also increase distortions in the market which is against the very idea of a transparent hedging mechanism.

“This seems like a wrong approach. Governor (Raghuram) Rajan has been liberal in perhaps everything but the currency market,” said Mecklai.

As per its practice, RBI will publish its intervention data in its bulletin.

“The data for the ETCD intervention will be published in the RBI monthly Bulletin as in the case of OTC intervention,” the central bank said.