The National Stock Exchange has approached the RBI to launch quanto cross-currency derivatives. This move aims to boost declining volumes in the currency segment after recent regulatory changes required proof of underlying exposure. These new instruments could allow trading in non-rupee currency pairs, potentially drawing activity back to regulated domestic exchanges.
The National Stock Exchange (NSE) is taking steps to revitalize its currency derivatives segment by seeking approval from the Reserve Bank of India (RBI) to introduce quanto cross-currency derivatives. The exchange has filed a proposal with the Securities and Exchange Board of India (SEBI) to secure the necessary regulatory nod for these products. This development comes as the exchange looks to expand its offerings beyond traditional rupee-based pairs to attract investors who prefer to trade global currency pairs like the Euro-USD or GBP-USD.
Impact of Recent Regulatory Changes
The need for new products follows a significant drop in trading activity within the domestic currency derivatives market. Volumes on the NSE fell sharply from ₹33,165 crore in March 2024 to approximately ₹5,000 crore by June 2026. This decline followed an RBI mandate that required market participants to provide documentary proof of underlying foreign currency exposure to trade in these derivatives. Before this rule, speculators and investors could participate with more flexibility. Since January 2025, the BSE has reported virtually no turnover in its currency derivatives segment, highlighting the severe impact of these regulatory requirements on the broader market.
How Quanto Derivatives Work
Quanto derivatives are designed to help investors gain exposure to foreign currency pairs without the risk of fluctuating settlement exchange rates. These contracts effectively fix the exchange rate for the settlement, meaning that while an investor benefits from the movement of the underlying currency pair, they do not face the uncertainty of how that profit or loss converts back into their home currency. By removing this specific layer of exchange rate risk, the NSE hopes to make these contracts more appealing to institutional and international participants who may have otherwise stayed away from the domestic market.
Expanding Beyond Currency
Beyond currency derivatives, the NSE’s broader strategy involves diversifying its product portfolio to include thermal coal futures and interest rate derivatives linked to corporate bond indices. Industry observers note that while these products may not provide immediate short-term volume spikes, they are essential for creating a more mature hedging ecosystem in India. By offering these instruments on a regulated platform, the exchange intends to shift trading activity away from unregulated channels, which have sometimes been used as alternatives when volumes on formal exchanges decline. The ultimate success of this initiative will depend on the regulatory framework provided by the RBI and the level of participation from institutional players who have been restricted by the current mandate regarding underlying exposure.