March 19th, 2008 
Tejinder In the past, there was only one way the Indian rupee moved against the dollar and the other high currencies. Then rupee increasingly depreciated year after year and there was an easy predictability about it. However, in the recent past and the present as well, since India is a rising economic story, the currency has a major and complex role to play.
Wire money online to India with Xoom.com for as low as $4.99.
It was learnt at a cost by many small and medium companies. The companies if India that bought cross-currency derivative products from banks last year are stuck with huge losses, and have sought the intervention of the courts and the RBI to bail them out. Since many currencies were rising against the dollar, including the Indian Rupee, the Indian companies took a contrarian call and bought cross-currency products which bet on a marginal dollar recovery. As many world currencies appreciated vis a vis the dollar, that did not happen. The exposure of small and medium size companies to these transactions is expected to be to the tune of up to $3 billion.
These companies or the private banks will have to provide for losses arising out of these exotic derivatives because these contracts are in the process of expiring. So there are many issues at stake.
Many companies blame that they were sold exotic products, when they entered in to such deals, by the private banks in violation of a circular from the RBI as it prohibits the sale of derivatives without a real underlying transaction. They say the RBI circular has the effect of law as per precedents set by judgments from higher courts. While this may be legally correct, it is also true these companies would have happily gone through with the deals if they had worked in their favour. They too have a responsibility for the mess.
Conflict of interest was also an issue there. Evidently banks were both advisors and sellers of the cross currency option. The two functions are clearly separated in more developed currency markets. The point is some of these problems would have been taken care of if a proper currency exchange under an independent regulator were functioning.
It has now been recognized by the RBI and it has written to the finance ministry for further consultation. An independent currency derivatives exchange with proper market makers, advisors and a strong regulator may go a long way in mitigating the current systemic failures.
Posted in 
