NSE Plans to Launch Quanto Cross-Currency Derivatives, Seeks RBI Approval

The National Stock Exchange (NSE) is preparing to introduce quanto cross-currency derivatives and has requested approval from the Reserve Bank of India (RBI). This information was revealed in the draft red herring prospectus (DRHP) submitted to the Securities and Exchange Board of India (Sebi) for NSE’s initial public offering (IPO).

Understanding Quanto Derivatives

Quanto derivatives are financial instruments that allow investors to gain exposure to the exchange rates between two foreign currencies, such as the euro versus the US dollar or the British pound sterling against the dollar. These contracts enable investors to participate without directly assuming the exchange rate risk in the settlement currency.

These contracts track the fluctuations of a foreign currency pair, with profits and losses settled in a predetermined currency according to a fixed conversion rate.

Uday Tardalkar, a senior financial services professional and chairman and independent director of listed holding company Rose Merc, explained that these “quantity adjusted” contracts offer foreign investors the advantage of fixing currency rates. This eliminates concerns about rupee fluctuations, thereby removing exchange rate risk.

NSE’s Broader Product Expansion Plans

The NSE confirmed filing the DRHP with Sebi but did not provide further comments at this time. Besides quanto derivatives, the exchange is also seeking regulatory approval for other products, including:

  • Thermal coal (Platts) futures in the commodities segment
  • Interest rate derivatives linked to the corporate bond index

Market Expert Insights and Industry Implications

Mrugank Paranjape, managing partner of MCQube and former MD & CEO of Multi-Commodity Exchange (MCX), welcomed the introduction of these hedging contracts. He noted that awareness and availability of hedging tools for currency and commodity risks are currently limited in India.

Paranjape emphasized the importance of exchanges developing products that may not immediately generate profits but serve a broader public utility.

Market experts observe that quanto derivatives could enable trading of global currency pairs on regulated domestic platforms. This move has the potential to revitalize exchange-traded currency volumes by broadening the selection beyond rupee-based pairs.

Context: Decline in Currency Derivatives Volumes

This initiative comes amid a significant decline in currency derivatives volumes since April 2024, following the RBI’s directive requiring underlying foreign currency exposure for participation in currency derivatives trading.

The mandate stipulated that exchange-traded rupee derivatives be used solely for hedging with documented exposure. As a result, the NSE’s average daily turnover volume (ADTV) in currency derivatives dropped sharply:

  • ₹33,165 crore in March 2024
  • ₹12,100 crore in April 2024
  • ₹5,258 crore in May 2024

Volumes continued decreasing, with June 2026 ADTV around ₹5,000 crore. Meanwhile, the Bombay Stock Exchange (BSE) currency derivatives turnover has ceased since January 2025.

Potential Impact and Market Expectations

Market participants indicate ongoing discussions supporting approval of cross-currency derivatives involving non-rupee pairs such as euro-dollar, pound-dollar, and dollar-yen. Expectations are that such approval could invigorate trading activity on exchanges.

A foreign exchange dealer from a state-owned bank noted that offering such products on regulated exchanges might attract transactions currently conducted outside formal platforms. This could be particularly important given the declining rupee currency derivatives volumes following regulatory changes.

Key Takeaways

  • NSE is seeking RBI approval to launch quanto cross-currency derivatives to broaden currency trading options.
  • Quanto derivatives help investors hedge exchange rate risks by fixing settlement currency rates.
  • The NSE also plans to introduce other products like thermal coal futures and interest rate derivatives.
  • Declining currency derivatives volumes post-RBI regulatory changes highlight the need for innovative products.
  • Approval of cross-currency derivatives could revitalize domestic currency trading and attract offshore activity.