RBI Working Paper No. 13/2020: Price Discrimination in Over-the-Counter Currency Derivatives

Last updated: 18 December 2020

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A recent Reserve Bank of India working paper reveals significant price discrimination within India's over-the-counter (OTC) currency derivatives market. The study found that clients dealing with more counterparties, particularly ten or more, paid considerably lower markups compared to those transacting with a single dealer. Retail clients and unlisted firms also faced higher markups than listed firms and foreign investors. The paper suggests that improving dealer access could enhance competition and lead to better pricing for all clients.

Reserve Bank of India

Date : Dec 15, 2020

RBI Working Paper No. 13/2020: Price Discrimination in Over-the-Counter Currency Derivatives

Today the Reserve Bank of India placed on its website a Working Paper titled “Price Discrimination in Over-the-Counter Currency Derivatives” under the Reserve Bank of India Working Paper Series.* The Paper is authored by Abhishek Kumar and Vidya Kamate.

This paper provides empirical evidence on the presence of considerable price discrimination in the Indian over-the-counter (OTC) currency derivatives market. Clients transacting with a single dealer counterparty paid an average markup of 18 paise, which falls to 9 paise for clients transacting with two dealers, and close to zero for clients transacting with ten or more dealers. This alludes to the role of bargaining power in pricing, possibly on account of dealer access. Retail clients (individuals, proprietorship firms and small firms) and unlisted firms were charged a higher markup of 19 paise and 11 paise, respectively, vis-à-vis listed firms and foreign investors, who paid a much lower markup of 3 to 4 paise. A majority (83 per cent) of clients transacted with a single dealer counterparty hinting at difficulties related to dealer access. The findings of the study make a case for improving market access to enhance competition which may result in better pricing for clients.

(Yogesh Dayal)
Chief General Manager

Press Release: 2020-2021/780

FAQ :

The paper provides empirical evidence of considerable price discrimination in the Indian over-the-counter (OTC) currency derivatives market.

Clients transacting with more dealers paid lower markups. The average markup was 18 paise with one dealer, falling to 9 paise with two, and close to zero with ten or more dealers.

Yes, retail clients (individuals, proprietorships, small firms) and unlisted firms were charged higher markups (19 paise and 11 paise respectively) compared to listed firms and foreign investors (3-4 paise).

The findings allude to the role of bargaining power in pricing, possibly due to difficulties in accessing dealers, as 83% of clients transacted with only one dealer.

The study suggests improving market access to enhance competition, which could result in better pricing for clients.

Notification No : 2020-2021/780
Source : https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50807

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