RBI issues clarification on currency derivatives circular, defers implementation to May 3

The RBI on Thursday issued a clarification on its exchange traded currency derivatives (ETCD) circular and has decided that these directions will now come into effect from May 3, 2024, instead of April 5 as was announced earlier.

The RBI said that the postponement in the date of implementation of the circular, by about a month, has been made in view of feedback received and recent developments related to some concerns expressed about participation in the ETCD market.

The RBI has pointed out that the regulatory framework for participation in ETCDs involving the Indian rupee is guided by the provisions of the Foreign Exchange Management Act (FEMA) and regulations framed thereunder which mandate that currency derivative contracts involving the Indian Rupee – both over-the-counter (OTC) and exchange traded – are permitted only for the purpose of hedging of exposure to foreign exchange rate risks.

The RBI said that for the purpose of ease of doing business, a circular dated June 20, 2014, permitted users of ETCDs to take positions up to $10 million per exchange without having to provide documentary evidence to establish the underlying exposure but did not provide any exemption from the requirement of having the exposure.

Accordingly, users are expected to ensure compliance with the requirement of having underlying exposure.

The limit of $10 million per exchange was subsequently amended and currently stands at a single limit of $100 million combined across all exchanges.

As announced in the Statement on Developmental and Regulatory Policies dated December 8, 2023, the regulatory framework governing the hedging of foreign exchange risks was comprehensively reviewed in 2020 with a view to ushering in a principle-based regime.

Based on this comprehensive review, public consultations, feedback received from market participants and experience gained since then, the regulatory framework has been made more comprehensive in respect of all types of transactions -- OTC and exchange traded -- under a single Master Direction to enhance operational efficiency and ease access to foreign exchange derivatives.

The circular dated January 5, 2024, sets out the Master Direction and reiterates the regulatory framework for participation in ETCDs involving the Indian Rupee without any change.

As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDs involving the Indian Rupee up to a limit of $100 million without having to produce documentary evidence of the underlying exposure, the RBI statement has explained.

Thus, it is emphasised that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI's policy approach, the RBI statement added.