With an aim to strengthen market discipline and ensure appropriate risk management in the foreign exchange market, the Reserve Bank of India (RBI) has unveiled several regulatory measures, including restrictions on rebooking of cancelled foreign exchange derivative contracts, reduction in the threshold for undertaking foreign exchange derivative transactions without establishing underlying exposure, and introduction of Foreign Exchange Risk Reserve (FERR).
As per regulatory measures, Authorised Dealers shall not permit users to rebook any foreign exchange derivative contract involving INR, whether deliverable or non-deliverable, which has been cancelled with any Authorised Dealer after the issuance of the Directions. Rollover of foreign exchange derivative contracts on maturity shall continue to be permitted, subject to compliance with the extant regulatory provisions. Besides, Authorised Dealers will be required to obtain and retain an undertaking from users entering into foreign exchange derivative contracts involving INR to hedge contracted exposures, confirming that the same underlying exposure has not been hedged with any other Authorised Dealer.
Further, in respect of all foreign exchange derivative contracts involving INR that are for notional value exceeding USD two million equivalent, Authorised Dealers shall be required to maintain with the Reserve Bank an FERR in cash, equal to 20 per cent of the INR equivalent of the notional amount of each transaction. This FERR shall be applicable for foreign exchange derivative contracts involving INR undertaken to hedge current account exposures where the user purchases foreign currency against the INR.
