RBI tightens currency derivative rules, mandates 20 per-cent reserve for specified contracts

The Reserve Bank of India has barred rebooking of cancelled rupee derivative contracts and cut the threshold for foreign exchange positions without underlying exposure to $5 million. It also introduced a 20 per cent reserve requirement for specified contracts

New Delhi: The Reserve Bank of India (RBI) on Saturday announced fresh regulatory curbs, cutting the threshold for unhedged foreign exchange derivative transactions from $100 million to $5 million and introducing a 20 per cent Foreign Exchange Risk Reserve (FERR), to curb currency speculation and ensure orderly market conditions.

Under the new directions, authorised dealers shall not permit users to rebook any foreign exchange derivative contract involving the rupee, whether deliverable or non-deliverable, that was cancelled with any authorised dealer after the issuance of the directions.

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However, the rollover of contracts upon maturity will continue to be permitted.

The RBI sharply reduced the threshold for undertaking foreign exchange derivative transactions without establishing an underlying exposure from the equivalent of $100 million to $5 million across all authorised dealers.

In addition, the threshold for taking positions in exchange-traded currency derivatives involving the rupee without an underlying exposure has also been cut from $100 million to $5 million across all recognised stock exchanges.

Authorised dealers will also be required to obtain and retain an undertaking from users entering into foreign exchange derivative contracts involving the Indian currency to hedge contracted exposures, confirming that the same underlying exposure has not been hedged with any other authorised dealer.

The central bank has also introduced the Foreign Exchange Risk Reserve (FERR).

For all rupee foreign exchange derivative contracts with a notional value exceeding the equivalent of $2 million, undertaken to hedge current account exposures in which users purchase foreign currency against the rupee, authorised dealers shall maintain a FERR with the Reserve Bank in cash, equivalent to 20 per cent of the rupee value of the notional amount.

The RBI added that the reserve must be maintained daily until the contract is terminated.

The central bank further said that any attempt by users to circumvent the requirement through multiple transactions would be considered a violation.

Authorised dealers will have to report FERR details daily through the Centralised Information Management System.

The directions under Circular 25 come into force with immediate effect, while the FERR directions under Circular 26 apply to contracts undertaken after the issuance of the circulars. The measures are intended to strengthen market discipline and ensure appropriate risk management while maintaining an orderly and transparent market environment, the RBI said.