RBI eases access to domestic forex derivatives markets

In a bid to ease ease access to the domestic foreign exchange (fx) derivative markets, the Reserve Bank of India (RBI) has decided to merge facilities for residents and non-residents for hedging of fx risk into a single unified facility; and allow users having valid exposures to hedge the same by using any available instrument.

Hedging is the activity of undertaking a derivative contract to offset the impact of an anticipated or a contracted exposure.

As per the final directions on “Risk Management and Inter-bank Dealings: Hedging of foreign exchange risk by Residents and Non-Residents”, the RBI has also allowed introduction of a facility to hedge anticipated exposures; and simplifying procedures for authorised dealers to offer foreign exchange derivatives.

An anticipated exposure is an exposure to the exchange rate of Indian Rupee (INR) against a foreign currency on account of current and capital account transactions permissible under FEMA, 1999, or any rules or regulations made thereunder, which are expected to be entered into in future.

The RBI said domestic non-retail corporates having an INR liability may, at their discretion, convert it into a foreign currency liability through a currency swap.

For derivative contracts involving INR, Authorised Dealers can allow a user to book derivative contracts up to $10 million equivalent of notional value (outstanding at any point in time) without the need to establish the existence of underlying exposure.

On Exchanges, users may take positions (long or short), without having to establish existence of underlying exposure, up to a single limit of $100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges.

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