Banks seek clarification on RBI forex measures

Indian banks have approached the RBI for clarification on new foreign exchange (forex) measures aimed at curbing speculative currency trades. These include a formula to calculate a 20% foreign exchange risk reserve (FERR), the impact on liquidity ratios, and how costs will be passed onto customers. The Foreign Exchange Dealers’ Association (FEDAI) sent a letter to the central bank outlining these concerns.

One issue is the notional value limit of $2 million on foreign exchange derivative contracts, which is not yet clear how this will be enforced. For example, if a client trades $2 million through multiple banks, determining whether they are within the limit on a gross or individual basis is unclear. Additionally, if exposures occur on separate days with the same bank, it may be treated as two exposures.

The RBI is expected to release frequently asked questions soon regarding these new rules. FEDAI members have asked for clarification on the scope of FERR, the $2 million threshold, how it affects liquidity and balance sheets, operational guidelines, implementation timeline, and the impact on customers. They need answers on hedging interest payments, including external commercial borrowing (ECB), the treatment of principal and interest payments for various financial instruments, and the classification of hedges on different types of transactions.

Banks also seek clarity on how the 20% levy will affect import and export flows that offset each other, whether the cash balance maintained with the RBI as FERR qualifies as high-quality liquid assets, and if it will count toward CRR or SLR requirements. Some banks are also asking if they can borrow against this FERR balance through various liquidity facilities like repo or MSF.

Overall, banks need more time to implement system changes, update policies, communicate requirements to customers, and establish necessary controls.