RBI revises foreign exchange rules: How they affect you
What's the story
The Reserve Bank of India (RBI) has announced new regulations for the foreign exchange market. The measures, announced through two circulars today, include restrictions on rebooking canceled foreign exchange derivative contracts and a reduction in transaction thresholds. A new Foreign Exchange Risk Reserve (FERR) has also been introduced as part of these changes.
Regulation
Prohibition on rebooking foreign exchange derivative contracts
The RBI's new rules prohibit authorized dealers from allowing users to rebook any foreign exchange derivative contract involving the Indian rupee, be it deliverable or non-deliverable.
This is if it has been canceled with any authorized dealer after the issuance of these directions.
However, rollover of foreign exchange derivative contracts on maturity will still be allowed as per existing regulatory provisions.
Threshold changes
Threshold for foreign exchange derivative transactions reduced
The RBI has also lowered the threshold for foreign exchange derivative transactions to hedge contracted exposures.
The new limit is now $5 million, down from the previous $100 million, across all authorized dealers.
A similar reduction has been made for positions in exchange-traded currency derivatives involving the Indian rupee, without establishing the existence of underlying exposure.
Documentation mandate
Undertaking from users mandated
The RBI's new rules also mandate authorized dealers to obtain and retain an undertaking from users entering into rupee-involving foreign exchange derivative contracts.
This is to hedge contracted exposures and confirm that the same underlying exposure hasn't been hedged with any other authorized dealer.
The move is part of the central bank's efforts to strengthen market discipline and ensure appropriate risk management.
Reserve introduction
Foreign exchange risk reserve introduced
The RBI has brought a Foreign Exchange Risk Reserve requirement for rupee-involving foreign exchange derivative contracts with a notional value exceeding $2 million.
Authorized dealers will have to maintain a cash reserve with the RBI, equal to 20% of the rupee equivalent of the notional amount of each such transaction.
This reserve requirement will apply to transactions undertaken to hedge current account exposures where users buy foreign currency against the rupee.