RBI issues clarification on forex hedging curbs

The Reserve Bank of India clarified its recent measures aimed at managing foreign exchange risks on Thursday. The Foreign Exchange Risk Reserve (FERR) requirement applies to certain rupee-linked derivatives contracts, but not all. The reserve requirement of 20% is calculated on the notional value of eligible contracts, with a threshold of $2 million equivalent.

Derivatives involving the rupee where a user buys foreign currency against the Indian currency are covered, while contracts where users sell foreign currency against the rupee are exempt. Transactions undertaken by authorized dealers for market-making or to assume proprietary positions are also outside the scope.

The reserve requirement applies to derivative contracts entered into after October 10 and October 12, with partial cancellations treated pro-rata. Authorised dealers must report FERR details daily to the RBI's Centralised Information Management System. The reserve does not earn interest, and minimum daily balances must cover CRR obligations and other cash reserve requirements.

Certain current account outflows, including interest payments on external commercial borrowings and dividends to non-resident investors, are explicitly exempt from the FERR requirement.