New Delhi: The Reserve Bank of India (RBI) on Saturday announced fresh regulatory curbs — cutting the unhedged foreign exchange derivative transaction threshold from $100 million to $5 million and introducing a 20 per cent Foreign Exchange Risk Reserve (FERR) — to curb currency speculation and ensure an orderly market.
Under new directions, authorised dealers shall not permit users to rebook any foreign exchange derivative contract involving the rupee whether deliverable or non-deliverable, which has been cancelled with any authorised dealer after issuance of directions.
However, rollover of contracts on maturity will continue to be permitted.
RBI sharply reduced threshold for undertaking foreign exchange derivative transactions without establishing underlying exposure from $100 million equivalent to $5 million equivalent across all authorised dealers.
In addition, the same threshold for taking positions in exchange-traded currency derivatives involving rupee without underlying exposure has also been cut from $100 million to $5 million across all recognised stock exchanges.
Moreover, authorised dealers will be required to obtain and retain an undertaking from users entering into foreign exchange derivative contracts involving the Indian currency to hedge contracted exposures, confirming same underlying has not been hedged with any other authorised dealer.
Apart from that, the central bank also introduced Foreign Exchange Risk Reserve (FERR).
For all foreign exchange derivative contracts for rupee with notional value exceeding $2 million equivalent undertaken to hedge current account exposures where users purchase foreign currency against rupee, authorised dealers shall maintain with the Reserve Bank an FERR in cash equal to 20 per cent of rupee equivalent of notional amount.
The RBI added that the reserve shall be maintained daily until termination of the contract.
Additionally, the central bank said any attempt by users to circumvent the requirement through multiple transactions will be considered a violation.
Also, the dealers shall report FERR details daily through the Centralised Information Management System.
Notably, directions under Circular 25 come into force with immediate effect, while FERR directions under Circular 26 apply to contracts undertaken after issuance. Measures are intended to strengthen market discipline and ensure appropriate risk management while maintaining orderly and transparent market environment, RBI said.
(IANS)
