Have you ignored the largest asset class? It’s safer & more rewarding

By Sajal Gupta

FYI, it is this same asset which would have caused your equity portfolio to erode value in August 2015. Still wondering? We are talking about ‘currencies’.

For retail investors, India is an equity-heavy market and when it comes to asset classes such as commodities, currencies and debt instruments, the market penetration level is still very low. The Indian scenario is clearly highlighted in the share of volumes in the chart below.



Talking about currencies, the maximum participation is seen by proprietary desks of brokers, mutual funds and foreign institutional investors ( FIIs) looking to hedge their equity exposure.

Retail participation is less, primarily because of lack of investor knowledge on the benefits of using this asset class. Corporate hedging has arguably been less than desirable and RBI has been repeatedly highlighting the need to increase it. 

As India gets integrated to the global economy more and more, both through trade and investment channels, corporate participation in the currency market to hedge their exposure is likely to increase.

Interest rates in India are among the highest in the world, and thus the rupee offers a high carry opportunity. These spreads are profitable in a low-volatility regime. At the moment, currency is the best asset class in terms of low volatility and high carry.

If one compares the rupee with the Japanese yen (the most widely traded carry currency), the yen-INR carry trade is the most lucrative one, with INR being a positive and yen a negative carry.

3 reasons to look at currencies as a diversification tool?

1. It is the largest traded asset class factoring in almost all global data before equity markets. Thus a lead indicator

2. It can be used to hedge your equity portfolio

3. It is a deep market - with little risk of manipulation

The currency space is poised to grow further as more participants enter the market and use currency as a hedging tool. Regulators have been proactive in catering to the needs of the growing markets, by allowing more instruments and opening the market to new participants, including the NRIs.

Globally, forex is a 24x5 market, whereas in India we are still a 8x5 market. However, with increasing participation and industry requirements, the case for extending the market timings is getting stronger than ever.

Advantages of having currency in your portfolio:

1) It lowers average volatility compared vis-à-vis equity markets (10-year average historical volume: Nifty - 21% vs. USD-INR - 7%)
2) Higher leverage compared with equities (equity: ~10x, USD-INR: ~30x) 



One big advantage of the currency market is its low volatility, which makes it a relatively safer investment bet. Note that the INR has emerged as one of the low-volatility currencies globally. Given the benign and improving domestic growth and stability parameters, the trend is expected to continue.

Strong and rising forex reserves, a stable external account, low inflation and reducing fiscal deficit underpin a stable currency regime going ahead.

Instruments available in currency markets


Note:
Liquidity is available in 1, 2 and 3-month contracts that expire on the third last trading day of the month at 12.30 pm. The margins are approximate and are subject to change depending on market volatility.

(The author is Head of Forex and Rates at Edelweiss Finance & Investments. Views and recommendations expressed in this section are analyst’s own and do not represent those of ETMarkets.com. Please consult your financial adviser before taking any position.)