RBI tightens rules on rupee foreign exchange derivatives: lower hedging threshold, new risk reserve

The Reserve Bank of India issued two circulars under the Foreign Exchange Management Act, 1999 tightening the rules for foreign exchange derivative contracts involving the Indian rupee, to support orderly functioning of the currency market. First, Authorised Dealers -- banks and other entities licensed to deal in foreign exchange -- can no longer let a customer rebook a cancelled rupee derivative contract, deliverable or non-deliverable, though rollovers at maturity remain allowed under existing rules. Second, the threshold above which a customer must prove an actual underlying exposure before hedging a contracted exposure is cut from USD 100 million to USD 5 million, a reduction that also applies, combined across recognised stock exchanges, to exchange-traded currency derivatives in rupees.

Third, Authorised Dealers must now obtain a written undertaking from every customer confirming that the same underlying exposure has not already been hedged through another dealer, to prevent double hedging. Fourth, for rupee derivative contracts above USD 2 million in notional value that hedge a current-account exposure where the customer buys foreign currency against rupees, Authorised Dealers must maintain a cash Foreign Exchange Risk Reserve with the RBI, equal to 20% of the contract's rupee-equivalent notional value. The measures, issued as A.P. (DIR Series) Circular Nos. 25 and 26, apply to every Authorised Dealer and every customer entering such contracts, and are aimed at curbing speculative and double-hedged positions in the rupee derivatives market.