finance-minister-launches-inr-usd-futures-and-options-contracts-in-the-international-exchanges-at-gift-ifsc

Context: Union Minister for Finance & Corporate Affairs launched INR-USD Futures and Options contracts on the two International Exchanges, viz BSE’s India INX and NSE’s NSE-IFSC, at GIFT International Financial Services Centre at Gandhinagar.

More about the news:

  • The INR-USD contracts at the exchanges in GIFT-IFSC will be available 22 hours across all time zones for all global participants from GIFT IFSC.
  • Since the trading hours of the GIFT exchanges are longer, up to 15 hours, and can be extended if required, the traders who wish to trade alongside other markets (Outside Indian Time zones) can use the GIFT exchanges.

About ‘’Options & Futures Contract’’

  • An options contract gives an investor the right, but not the obligation, to buy (or sell) shares at a specific price at any time, as long as the contract is in effect. 
    • Types of Options: Call and Put Options
    • A call option is an offer to buy a stock at the strike price before the agreement expires. 
    • A put option is an offer to sell a stock at a specific price.
  • By contrast, a futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date, unless the holder's position is closed before the expiration date.
  • Benefits: Options and futures are both financial products investors can use to make money or to hedge current investments. 
    • Hedging means that one can use a currency future contract to exchange one currency for an another at a future date at a price decided on the day of the purchase of the contract.

Significance: Over the last decade or so a significant market share in financial services related to India has moved to other international financial centres. 

  • Employment generation: Bringing this business to India is clearly beneficial in terms of economic activity and employment gains for India. 
  • Bring global trade in India: Given the world class business environment and competitive tax regime at GIFT-IFSC, it is expected that trading of INR-USD contracts may bring volumes to India. 
  • Connect India’s IFSC: This would also bring larger global participation in India through IFSC and connect India’s IFSC globally.

What is an IFSC and how does it work?

  • An international financial services centre caters to customers outside the jurisdiction of domestic economy, dealing with flows of finance, financial products and services across borders.
  • Such centres deal with flows of finance, financial products and services across borders. London, New York and Singapore can be counted as global financial centres.
  • Gujarat International Finance Tec-City Co. Ltd is being developed as the country’s first international financial services centre (IFSC).
  • The SEZ Act 2005 allows setting up an IFSC in an SEZ or as an SEZ after approval from the central government.

What are the building blocks of an IFSC?

IFSCs such as Dubai International Financial Centre and Shanghai International Financial Centre, which are located within SEZs, have six key building blocks:

  • Rational legal regulatory framework
  • Sustainable local economy
  • Stable political environment
  • Developed infrastructure
  • Strategic location
  • Good quality of life

What are the services an IFSC can provide?

  • Fund-raising services for individuals, corporations and governments
  • Asset management and global portfolio diversification undertaken by pension funds, insurance companies and mutual fund
  • Wealth management
  • Global tax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.
  • Global and regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching
  • Risk management operations such as insurance and reinsurance
  • Merger and acquisition activities among trans-national corporations

Concerns:

  • An expert panel headed by former World Bank economist Percy Mistry submitted a report on making Mumbai an international financial centre in 2007. 
  • However, the global financial crisis that unfolded in 2008 made countries including India cautious about rapidly opening up their financial sectors.
Image Source: Economic Times