The Reserve Bank of India (RBI) has introduced fresh restrictions on rupee derivatives to curb currency speculation and maintain an orderly foreign exchange market. The central bank has reduced the threshold for foreign exchange derivative transactions without underlying exposure from 100 million to 5 million dollars across authorised dealers and recognised stock exchanges.
Under the new directions, authorised dealers will not be allowed to rebook rupee-involving foreign exchange derivative contracts cancelled after the issuance of the directions. However, rollover of contracts upon maturity will continue to be permitted. The RBI has also directed users hedging contracted exposures to confirm that the same underlying exposure has not been hedged with another authorised dealer.
Additionally, the RBI has introduced a Foreign Exchange Risk Reserve (FERR), requiring authorised dealers to maintain a cash reserve equivalent to 20 per cent of the rupee value of qualifying derivative contracts exceeding $2 million that hedge current-account exposures involving the purchase of foreign currency against the rupee. The reserve must be maintained daily until the contract is terminated.
The central bank has warned that attempts to circumvent the requirements through multiple transactions will be treated as violations. Authorised dealers must also report FERR details daily through the Centralised Information Management System. While the directions under Circular No. 25 take effect immediately, the FERR requirements under Circular No. 26 apply to contracts undertaken after the issuance of the directions. The measures aim to strengthen market discipline, improve risk management and ensure transparency in the foreign exchange market.
