RBI tightens forex derivative rules: What changes for hedging, cancelled trades
The RBI has tightened rules for rupee-linked foreign exchange derivatives, restricting the rebooking of cancelled contracts and cutting the threshold for transactions without establishing underlying exposure to $5 million from $100 million. It has also mandated additional checks for hedging activities and introduced a 20% cash reserve requirement for certain transactions.
The Reserve Bank of India (RBI) has implemented stricter rules for forex derivative transactions involving the Indian rupee. Key changes include restricting the rebooking of cancelled contracts, lowering transaction limits without underlying exposure, and adding checks for hedging activities. Authorized dealers are prohibited from allowing users to rebook any rupee-linked foreign exchange derivative contract that was canceled after issuance of the RBI's directives.
Rollovers of contracts at maturity remain permissible, subject to existing regulations. The RBI has also reduced the threshold for hedging contracted exposures without establishing underlying exposure to $5 million equivalent, down from $100 million. This applies to both exchange-traded currency derivatives and rupee-linked foreign exchange derivatives.
For contracts exceeding $2 million in notional value, authorized dealers must maintain a 20% Foreign Exchange Risk Reserve (FERR) with the RBI, ensuring cash reserves equal to 20% of the rupee equivalent of the notional amount. The central bank aims to enhance market discipline, improve risk management, and maintain orderly functioning of the foreign exchange market.
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