The Reserve Bank of India (RBI) reported in a recent update released over the weekend that, in consideration of prevailing market dynamics and to facilitate the stable operation of the foreign exchange market, the central bank has today published two circulars detailing a series of regulatory actions designed to bolster the Indian Rupee. These measures are as follows:
Authorised Dealers are prohibited from facilitating the rebooking of any cancelled foreign exchange derivative contracts involving the Indian Rupee, encompassing both deliverable and non-deliverable instruments, following their cancellation with an Authorised Dealer subsequent to the issuance of the Directions. The rollover of foreign exchange derivative contracts upon maturity will remain permissible, contingent upon adherence to prevailing regulatory guidelines.
Lowered threshold for foreign exchange derivative transactions without underlying exposure: The current limit of USD 100 million equivalent for executing foreign exchange derivative transactions to hedge contracted exposures absent proof of the underlying exposure has been revised to USD 5 million equivalent, applicable to all Authorised Dealers. The parallel threshold for assuming positions in exchange-traded currency derivatives involving INR, without establishing the existence of underlying exposure, has similarly decreased from USD 100 million to USD 5 million equivalent, across all Recognised Stock Exchanges taken together.
Authorised Dealers will be obligated to secure and maintain a confirmation from counterparties engaging in foreign exchange derivative contracts involving INR, validating that the related underlying exposure has not been hedged with any alternative Authorised Dealer for the purpose of hedging contracted exposures.
Authorized Dealers will be mandated to hold a Foreign Exchange Risk Reserve (FERR) with the Reserve Bank in cash, amounting to 20 percent of the INR equivalent of the notional value of each transaction, for all foreign exchange derivative contracts involving INR with a notional value surpassing USD two million equivalent. This FERR applies to foreign exchange derivative contracts involving INR utilized to hedge current account exposures where the user acquires foreign currency against the INR. The Reserve Bank indicated that these measures are designed to reinforce market discipline and facilitate suitable risk management within the foreign exchange market, while preserving an orderly and transparent market environment.