Given the large current account deficit (CAD), presumably it is the worry about the rupee that has got RBI concerned enough to issue a circular on overseas stock exchanges offering rupee hedges or products that are linked to the Indian market without prior permission. So if, for instance, the Dubai stock exchange is partially owned by an Indian corporate, the Dubai stock exchange will not be allowed to offer, say, rupee-dollar hedges. The problem is that it is not clear what RBI hopes to achieve, except to spook the market into believing the central bank fears the rupee is going to weaken further.
To the extent companies/individuals want to hedge, they will do so, never mind what restrictions you put. When exchanges didn’t offer rupee-dollar hedges, the bulk of the market took place in opaque over-the-counter markets. So, if investors in Dubai can’t trade on the exchange because an Indian company owns part of the exchange, two things will happen. Either the trade will move from Dubai to another exchange, or it will shift from the exchange to the grey market. And given that exchanges in the US like the Chicago Mercantile Exchange (CME) are now offering rupee-dollar hedges, how does RBI control this since, as yet, there is no Indian ownership of the CME?
An interesting fallout of the circular pertains to trades in indices linked to the Indian stock market. If the exchange is not partially or wholly owned by an Indian entity, RBI cannot hope to stop such trades. Given that these trades can be conducted in dollars in overseas markets and in rupees in the local market, this effectively offers a rupee-dollar hedge. Instead of coming out with circuitous directions, RBI needs to understand why more such trades don’t take place in India, and then find ways to address the issue. At the end of the day, if rupee hedges are demanded by the market, they will be supplied. Finding artificial ways to stop them will only mean that amount of trading will take place outside the country. That benefits no one.