By Anindya Banerjee, Senior, Manager Currency Derivatives Research Desk, Kotak Securities.So we understand the market and what makes it work, we have met the bank that is banker to the banks and now it’s time to bring in the high rollers or the players who ensure the money keeping rolling, literally!
As we know, the currency markets in India, despite being nascent, are showing promising growth despite the ongoing global crises. Now more than ever, players in the Indian markets have reason to play, hedge and invest their resources into growing their wealth and capital. Reminiscent of 1991, the Indian Rupee is once again poised on a possible revolution in terms of perception and regaining its strength and position as a fast growing currency.
As with every market place, the direction of the wind is dependent on the players who influence key factors that matter. As a country’s purchasing power is based on the strength its currency and determined by its demand in relation to the availability of its supply, it also follows that maintaining and managing this strength comes from the soundness and the expertise of the players in its markets. The players who define the Indian markets are broadly divided into six major categories –
• Government – By far the biggest and strongest player of them all. Every government is entrusted with the task of balancing the books and catering for revenue to meet expenses in the next financial year. Their exposure to imports and foreign exchange defines subsequent monetary policy, reforms and changes in taxation structures and restrictions in investment. Give their role as long term enablers of national and economic growth, the government can often be disruptive as a force as well, especially to curb upcoming crises or insulate against adverse global trends with respect to currency.• Central Banks – After the Government, it is the RBI that comes in next in its dual role of controlling and facilitating the moment of the rupee and various other currencies, Indian businesses are exposed to. Entrusted with ensuring liquidity and curbing inflation and other factors that may adversely impact the Rupee, they usually stabilize the money markets with timely interventions and restrictions via policy decisions. The RBI is also responsible for India’s FOREX reserves, balancing payments, managing deficits and creating a financial environment conducive to foreign investment in India.
• Commercial Banks – The other major player in Indian currency markets are the commercial and investment banks that facilitate funds for their customers to do business with global counterparts. Small, medium, large private and public banks in India participate in FOREX trading – either themselves or on behalf of their customers to offset exposure and risk, or as an investment tool to multiply their current invested capital. With dedicated dealing desks and customised risk management strategies, banks also offer due diligence in global M&A deals and profit on investment for HNI customers. Given their access to information both from the markets and as defined by their clients’ interests, banks have the distinction of offering unique insights into possible market trend and possible price movements, often making them responsible for market sentiment and equally subject to market volatility.• Investment Firms and Hedge Funds – For Ultra HNI families and for large corporate clients, FOREX trading is not limited to managing risk exposure. Currency trading is also considered an alternate investment avenue for raising capital to cater to provisions, pension, gratuities and endowments. Investment firms and Hedge Funds facilitate FOREX trading for domestic as well as global players while hedging risk and maximising profits through either hedging or arbitrage strategies or while employing combinations of both. FII’s and NRI’s who usually would not be allowed to trade in Indian markets, often have Hedge Funds to represent their interests.
• Inter-bank Forex Brokers – They deal with various banks and are not allowed to trade with corporate clients.• India Inc – All corporates that function as India Inc, having significant exports or imports play the currency markets to manage risk and increase efficacy of invested capital. These companies participate directly or indirectly through banks and exchange brokers to represent their interests and goals.
• Speculators – This segment of players who have no commercial interest in FOREX and are only participating in currency trading to increase their capital gains from price movements of currencies. Given their high appetite for risk, speculators offer liquidity to the marketplace, which is key for hedgers to hedge their price risk effectively. Due to RBI regulation, such players are mostly restricted to the exchange traded currency derivatives market.• Retail Investors – They are the latest entrants into the FOREX space and still grappling with the intricacies and technicalities that form the currency markets. This segment is fast seeing growth in numbers given the increasing interest that retail investors are displaying with regards the currency space and more specifically the exchange traded currency derivative space.
As with any financial instruments, trading in currency and currency derivatives comes replete with risk even if used to hedge exposure and adverse movements. Thus, what matters most is to keep your ears to the ground and pulse on calls made by key market players. As investors, players, participants or voyeurs of the currency marketplace, we all need to ensure that the homework is done and the dots are connected to ensure our goals effectively. Following these key market players effectively is key to becoming apt at understanding under currents and being ably capable of playing the game, the all star way!