RBI Tightens Forex Rules as Rupee Nears 97
The Reserve Bank of India has tightened rules governing foreign exchange derivatives as the rupee trades close to 97 against the US dollar, introducing measures aimed at curbing excessive speculative activity and strengthening oversight of currency transactions.
RBI cuts forex derivative exposure threshold
One of the biggest changes is a sharp reduction in the threshold for foreign exchange derivative transactions that can be undertaken without establishing an underlying exposure.
The limit has been cut from $100 million to $5 million across authorised dealers. A similar $5 million aggregate threshold will apply to exchange-traded currency derivatives involving the rupee.
The RBI has also restricted the rebooking of cancelled foreign exchange derivative contracts involving the rupee. Rollovers at maturity will, however, continue to be permitted subject to existing rules.
RBI introduces 20% Foreign Exchange Risk Reserve
For specified rupee derivative contracts with a notional value above $2 million, authorised dealers will be required to maintain a Foreign Exchange Risk Reserve equal to 20% of the rupee value of the transaction.
The requirement applies to covered contracts used for hedging certain current-account exposures where foreign currency is purchased against the rupee.
Banks must also obtain declarations confirming that the same underlying exposure has not already been hedged through another authorised dealer.
Rupee remains under pressure near record low
The measures come as the rupee remains close to 97 per dollar after closing around 96.73 on October 9.
The currency has been pressured by elevated crude oil prices, global financial conditions and capital flows. The RBI has also raised the repo rate by 25 basis points to 5.50% and introduced additional measures aimed at managing liquidity and dollar demand.
