Currency derivatives on Zerodha

The currency derivatives segment on Zerodha provides access to exchange-traded currency futures and options on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This segment allows Indian residents to trade standardised contracts on the Indian Rupee (INR) against major foreign currencies. It is distinct from the over-the-counter (OTC) forex market operated by banks and authorised dealers, and is regulated jointly by SEBI and the Reserve Bank of India (RBI).

Currency derivatives in India were introduced in 2008 following a joint working group recommendation by SEBI and RBI. NSE launched USD/INR futures on 29 August 2008; options on USD/INR followed in October 2010.

Regulatory framework

Joint SEBI-RBI oversight

Currency derivatives in India operate under a dual-regulator model. SEBI regulates the exchange and broker conduct, while RBI governs foreign exchange under the Foreign Exchange Management Act, 1999 (FEMA) and the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations.

RBI’s circular AP(DIR Series) Circular No. 147 (2014) and subsequent circulars define position limits for residents and the purpose for which currency derivatives may be used. Indian residents may hold currency derivative positions up to USD 100 million (equivalent) without producing evidence of underlying foreign currency exposure. Positions above USD 100 million require documentary proof of a legitimate underlying exposure (hedging purpose).

Foreign Portfolio Investors (FPIs) are subject to separate position limits defined in RBI-SEBI joint circulars and are permitted to participate only for hedging their Indian rupee-denominated assets.

SEBI product approval

SEBI approves currency derivative products on stock exchanges under the Securities Contracts (Regulation) Act, 1956. Each new currency pair requires SEBI’s product committee approval. SEBI’s guidelines for currency derivatives are consolidated in its Master Circular for Derivatives.

Currency pairs available on Zerodha

NSE and BSE offer the following exchange-traded currency pairs accessible through Zerodha’s Kite platform:

Cross-currency pairs (EUR/USD, GBP/USD, USD/JPY) were introduced by NSE and BSE in 2018 following RBI and SEBI approval. These are settled in Indian Rupees (not in the foreign currency component), based on the RBI reference rate.

Contract specifications

Futures contracts

Currency futures are available with monthly expiry on the last business day of each month. Two to twelve months of contracts are typically available for trading simultaneously, with liquidity concentrated in the near-month contract.

• Settlement: Cash settled in INR based on RBI’s reference rate on expiry day.
• Reference rate source: RBI publishes the reference rate at approximately 13:00 IST on every working day. On the last business day of the month, this rate is used for final settlement.
• Settlement price: The RBI reference rate published on the last trading day of the contract.

Options contracts

USD/INR options are European-style (exercisable only at expiry). Options are available for USD/INR only on NSE and BSE. Monthly expiry aligns with futures contracts.

• Exercise settlement: Cash settled based on RBI reference rate on expiry day.
• Strike intervals: Rs 0.25 paise for near-the-money strikes; wider intervals for far-from-the-money strikes.
• Premium quotation: In INR per USD, with a lot size of USD 1,000.

Product codes in the currency segment

Kite uses the following product codes for currency derivatives:

NRML

NRML is the carry-forward product. Positions held under NRML can be carried overnight and rolled before expiry. Full exchange-mandated margin is required.

MIS

MIS is the intraday product. Reduced margins apply (typically 40% of NRML margin). Positions are auto-squared off before market close. Currency MIS auto-square-off typically occurs between 16:45 and 17:00 IST (currency markets trade until 17:00 IST, unlike equity which closes at 15:30 IST).

Trading hours

Currency derivatives trade from 09:00 to 17:00 IST on NSE and BSE. This extended session (compared to equity’s 09:15 to 15:30) reflects the global currency market hours and allows participants to react to events occurring after the equity market close, including RBI press releases, US economic data, and European market developments.

Margin requirements

Currency derivatives margins follow a SPAN-based system similar to equity F&O. NSE publishes SPAN files for currency contracts twice daily.

Typical initial margins for USD/INR futures range from 2% to 5% of notional contract value depending on volatility. Exposure margin is an additional 1% to 2%.

For options writers, SPAN plus Exposure Margin applies. For options buyers, only the premium is required.

Brokerage and charges

Currency derivatives are explicitly exempt from Securities Transaction Tax (STT) under the Finance Act, 2004, as they do not involve securities as defined under the Securities Contracts (Regulation) Act. This distinguishes them from equity derivatives where STT applies.

Position limits

Position limits in currency derivatives are defined at three levels:

1. Client level: USD 100 million (equivalent) aggregate across all currency pairs without documentary proof of underlying exposure.
2. Trading member level: USD 500 million (equivalent) aggregate.
3. Market level: Open interest limits set by NSE and BSE, typically a percentage of total market open interest.

Clients exceeding the client-level position limit must provide documentary evidence of underlying hedging exposure (trade invoices, loan agreements, foreign currency liabilities) to the broker within two working days. Zerodha monitors position limits and may require clients to reduce positions if limits are breached.

Hedging use case

The primary economic purpose of currency derivatives is hedging foreign exchange risk. Common hedging participants include:

• Importers: An importer who will pay USD 100,000 in 60 days can buy USD/INR futures to lock in the exchange rate, protecting against INR depreciation.
• Exporters: An exporter expecting USD inflows can sell USD/INR futures, protecting against INR appreciation.
• FPIs: Foreign investors holding INR equity can sell USD/INR futures to hedge the currency component of their return.

Retail speculative trading also constitutes a significant portion of currency derivative volumes, particularly in USD/INR which accounts for over 90% of currency derivative turnover in India.

Tax treatment

Currency derivative gains and losses are treated as non-speculative business income under Section 43(5) of the Income Tax Act, 1961, identical to equity F&O. Key implications:

• Gains are taxed at the applicable income tax slab rate.
• Losses can be carried forward for eight years and set off against future business profits.
• ITR-3 is required for filing.
• Turnover for audit purposes is the absolute sum of profits and losses (similar to equity F&O).

Since currency derivatives are exempt from STT, there is no STT component in the cost computation or deductible charges calculation.

Comparison with OTC forex

The OTC forex market, operated by authorised dealers under RBI’s Foreign Exchange Dealers’ Association of India (FEDAI) framework, is not accessible to retail investors for speculative purposes.

Common operational considerations

Extended trading hours

Currency markets close at 17:00 IST, two hours after equity markets. Kite remains open for currency orders during this window. Clients who use currency as an intraday product (MIS) must ensure positions are closed before 16:45 IST to avoid auto-square-off.

Reference rate dependency

The final settlement price for both futures and options is entirely dependent on the RBI reference rate. In volatile conditions (e.g., RBI intervention days, global risk-off events), the reference rate can differ materially from live market prices in the final minutes of trading. This basis risk is an inherent feature of the product.

TPIN not applicable

Currency derivatives are derivatives, not securities held in a demat account. TPIN (for demat debits) does not apply. Margin settlement for currency derivatives follows the same cash collateral and pledge mechanism as equity F&O.

References

1. RBI Circular AP(DIR Series) Circular No. 147 (2014), Position limits for currency derivatives.
2. SEBI Master Circular for Derivatives, Currency derivatives product guidelines.
3. Securities Contracts (Regulation) Act, 1956, Section 18A.
4. Finance Act, 2004, STT provisions (Schedule to Chapter VII); currency derivative exemption.
5. Foreign Exchange Management Act, 1999.
6. NSE Currency Derivatives Segment, Contract specifications document.
7. Income Tax Act, 1961, Section 43(5).