RBI Proposes Flexible Forex Rules to Ease Hedging and Market Operations

Reserve Bank of India (RBI) on Tuesday released draft directions proposing greater flexibility for authorised persons to undertake foreign exchange transactions. 

The move follows a review of current regulations and aims to improve efficiency in hedging exposures, balance sheet management, and market-making activities while also simplifying reporting requirements.

Authorised dealers, including banks and standalone primary dealers, actively participate in the foreign exchange market to manage currency risks and provide liquidity. The proposed framework seeks to streamline these activities and offer more operational freedom within regulated boundaries.

Expanded Scope for Transactions and Hedging

Under the draft guidelines, authorised dealers will be allowed to undertake permitted foreign exchange transactions with other authorised dealers to hedge exposures, manage balance sheets, conduct market-making operations, and manage proprietary positions. 

They will also be allowed to borrow and lend in foreign currencies, enabling improved liquidity management.

The central bank has also proposed allowing authorised dealers to undertake non-deliverable derivative contracts involving the Indian rupee with other authorised dealers. 

Additionally, foreign exchange and foreign currency interest rate derivative contracts can be executed through electronic trading platforms approved by the RBI.

Overseas Trading and Gold Hedging Provisions

The draft also allows authorised dealers to trade on electronic trading platforms outside India, provided certain safeguards are met. One such condition is that the platform must operate in a jurisdiction that is a member of the Financial Action Task Force (FATF), ensuring compliance with international financial safety standards.

Further, banks operating under the Gold Monetisation Scheme, 2015, and those permitted to enter forward gold contracts may hedge gold price risks in overseas markets using exchange-traded or over-the-counter products, subject to regulatory safeguards.

Also Read: RBI Governor Sanjay Malhotra Highlights Timely Credit Access for MSMEs as Ongoing Policy Focus!

Conclusion

The proposed regulatory changes aim to modernise India’s foreign exchange framework by offering operational flexibility while maintaining oversight. If implemented, the new rules could improve risk management, boost forex market efficiency, and reduce compliance burdens for authorised dealers, strengthening India’s financial market ecosystem.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a private recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.