Currency Derivatives Open Interest Surges Amid Rupee Volatility and RBI Intervention

Rupee Depreciation Sparks Higher Hedging in Currency Derivatives Market

The Indian rupee (INR) has experienced heightened volatility, leading to a surge in open interest (OI) in currency derivatives as market participants ramp up hedging activities. According to Bloomberg data, the rupee depreciated to ₹87.2025 per USD on February 26, 2025, compared to ₹83.8213 on October 3, 2024. This significant decline has prompted corporates, banks, and financial institutions to increase hedging through futures contracts, driving activity in the foreign exchange derivatives market.

Currency Futures See Record Open Interest Amid Market Uncertainty

As per the National Stock Exchange of India (NSE), the open interest in currency futures surged to 7-8 crore contracts per month between October 2024 and February 2025, marking the highest level since May 2024. The increase in outstanding contracts indicates that traders are actively managing currency risks in response to rupee fluctuations.

Additionally, the average daily turnover in the currency derivatives market has remained strong, ranging between ₹8,000 crore and ₹20,000 crore over the past five months. This surge in turnover reflects increased speculative activity and hedging by market participants.

Why Is Open Interest Increasing in Currency Derivatives?

Several factors have contributed to the rise in open interest and trading volume in currency derivatives:

• Rupee Volatility: The sharp depreciation of the rupee against the US dollar has led traders to hedge their foreign exchange exposure.
• RBI Intervention: The Reserve Bank of India (RBI) has been actively intervening in the forex market, participating in NSE’s futures and non-deliverable forward (NDF) markets to stabilize the rupee.
• Corporate and Banking Sector Hedging: Exporters, importers, and financial institutions are increasingly using currency futures and options to mitigate risks.

Rupee Depreciation Driven by Domestic and Global Economic Factors

The Indian rupee has weakened due to multiple geopolitical and macroeconomic factors, including:

1. Slowing Economic Growth: India’s GDP growth rate slowed to 6.4% in FY25, the lowest in four years.
2. Widening Trade Deficit: Rising imports and declining exports have increased demand for foreign currency.
3. Surging Crude Oil Prices: Higher oil prices have exacerbated India’s current account deficit, leading to greater pressure on the rupee.
4. US Dollar Strength: The US Federal Reserve’s indication of fewer rate cuts in 2025 has strengthened the dollar, leading to a capital outflow from emerging markets like India.
5. Global Trade Tensions: US President Donald Trump’s tariffs on Canada, Mexico, and China have affected global trade, indirectly impacting emerging market currencies, including the Indian rupee.

RBI’s Forex Market Intervention and Regulatory Changes

To curb excessive rupee depreciation, the RBI has been selling US dollars in both the spot and forward markets. However, this intervention has led to a sharp decline in India’s forex reserves, which have fallen by over $75 billion since September 2024.

Additionally, the RBI introduced new regulations in 2024 restricting currency derivatives trading to participants with valid underlying exposure. These changes initially led to a decline in open interest, but the recent surge in rupee volatility has revived hedging activity in the market.

What Lies Ahead for the Indian Rupee and Currency Derivatives Market?

Market analysts believe that if rupee volatility persists, open interest in currency futures and trading volumes will continue to rise. The RBI’s future intervention strategy, global economic trends, and foreign capital inflows will play a crucial role in determining the rupee’s trajectory in the coming months.

With ongoing geopolitical uncertainties and economic shifts, hedging strategies in the Indian currency derivatives market are expected to remain strong, ensuring risk mitigation amid market fluctuations.