Mumbai: The Reserve Bank of India (RBI) on Thursday issued a set of FAQs to clarify the scope and calculation of its 20 per cent Foreign Exchange Risk Reserve (FERR), including exemptions for certain hedges and the treatment of options and rolled-over contracts.
The RBI said the FERR would apply to user contracts exceeding $2 million equivalent in which the user purchases foreign currency against the rupee to hedge current-account transactions. Contracts involving the sale of foreign currency against the rupee, as well as those hedging capital-account transactions, are excluded.
“The FERR requirement applies to specified derivative contracts undertaken by authorised dealers with users having a notional value exceeding USD 2 million equivalent. Accordingly, a derivative contract having a notional value of USD 2 million equivalent or less undertaken by an authorised dealer with a user is not subject to the requirement. However, the authorised dealers shall guard against any attempt towards structuring of derivative transactions for avoidance of these provisions,” the FAQs state.
The RBI has also clarified that the FERR will also not apply to derivative contracts undertaken by users for hedging their current account outflows that arise from a capital account transaction, such as interest on External Commercial Borrowings (ECBs) or coupons on resident debt instruments held by non-residents, or dividends payable to non-resident investors, as these are current account transactions under FEMA rules.
The FERR requirement applies only to foreign exchange derivative contracts involving the rupee. It does not apply to foreign exchange derivative contracts not involving the Indian currency, the RBI said.
Banks’ own qualifying hedges of currency risks arising from these exposures will, however, continue to attract the reserve requirement.
The RBI has clarified that the amount of the FERR shall be equal to 20 per cent of the Indian rupee equivalent of the notional amount of each applicable derivative contract. For example, for a derivative contract with a notional amount of $10 million against the rupee undertaken at a contracted rate of Rs 95 per US dollar, the notional amount is Rs 95 crore. The applicable FERR shall be Rs 19 crore.
The FERR shall be deposited and maintained in the authorised dealer’s current account with the Reserve Bank. The FERR is required to be maintained on a daily basis. The FERR applicable for a particular derivative contract shall be maintained from the working day immediately following the date of undertaking the contract on a gross basis viz. on each such derivative transaction. Granular details of the qualifying transactions and associated FERR shall be maintained by the authorised dealer and subjected to audit, the RBI further explained.
The RBI has also clarified that FERR maintained by authorised dealers with the Reserve Bank shall not earn any interest. The FERR applicable for a particular derivative contract is required to be maintained until a day after the termination of the derivative contract.
(IANS)
