RBI Expands Forex Risk Reserve Rules, Restricts Rupee Derivatives

The Reserve Bank of India (RBI) has extended forex reserve requirements to banks’ own currency hedges and tightened rules for rupee-linked derivatives, as per news reports. 

The changes come alongside other measures to curb dollar demand as the rupee faces pressure from high crude oil prices and foreign capital outflows. 

New Reserve Requirement for Banks 

Authorised dealers must maintain a reserve equal to 20% of the rupee value of each eligible derivative contract when buying foreign currency against the rupee. 

The reserve must be deposited with the RBI in cash daily and maintained until the contract ends. No minimum contract-value threshold applies to these newly covered transactions. 

Existing Rules for User Contracts 

The existing Foreign Exchange Risk Reserve (FERR) requirement applies to certain user contracts for hedging current account transactions when their notional value exceeds $2 million. 

Attempts to avoid this threshold by splitting transactions across authorised dealers are treated as violations. 

Non-Resident Derivatives Limited to Hedging 

The RBI has restricted rupee-linked non-deliverable derivative contracts offered to non-residents to hedging purposes. 

Previously, eligible Category-I banks with an operating IFSC Banking Unit and standalone Category-III primary dealers could offer these contracts without restrictions on their purpose. 

Dollar Facility for Oil Companies 

The RBI has introduced a special window to meet the full daily dollar requirements of Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. 

The facility became operational on Monday and aims to move their dollar purchases away from the spot market. 

Forex Exposure Limit Cut to $5 Million 

The threshold for hedging contracted exposures without establishing the underlying exposure has been reduced from $100 million to $5 million. 

The single limit on positions across rupee-linked currency pairs and recognised stock exchanges has also been cut to $5 million. 

Restrictions on Cancelled Contracts 

Users can no longer rebook contracts cancelled with an authorised dealer. Dealers must also obtain an undertaking confirming that the same exposure has not been hedged through another dealer. 

Read More: IMF Raises India’s GDP Growth Forecast to 7% for FY27! 

Conclusion 

The RBI’s latest measures tighten reserve requirements, narrow the permitted use of certain derivatives and lower forex exposure limits. 

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