RBI Draft Rules on Rupee Contracts May Encourage Expansion in GIFT City

The Reserve Bank of India (RBI) has issued a draft framework proposing changes to rules governing rupee non-deliverable derivative contracts (NDDCs). The proposals set out conditions under which authorised dealer (AD) Category-I banks may undertake such transactions. 

As per news reports, under the draft, AD banks can enter into NDDCs with other ADs and overseas entities, including IFSC Banking Units (IBUs) and Offshore Banking Units (OBUs).  

These deals may be executed directly or on a back-to-back basis through overseas branches. Contracts can be cash-settled in rupees or any foreign currency. 

Operational IBU Made a Precondition 

The draft specifies that the bank, or its non-resident parent, must have an operational IBU to undertake these contracts. This links access to offshore rupee derivative activity with a presence in the International Financial Services Centre at GIFT City. 

The central bank has also proposed allowing ADs to transact in foreign exchange and currency interest rate derivatives on electronic trading platforms (ETPs) located outside India. For rupee-related trades, ADs may deal only with non-residents. 

Such offshore platforms must be based in jurisdictions that are members of the Financial Action Task Force and regulated by authorities associated with the Committee on Payments and Market Infrastructures or the International Organisation of Securities Commissions. Operators will be required to publicly disseminate transaction data. 

Broader Derivative  

The draft recognises market-making and proprietary positions as valid purposes for over-the-counter derivative transactions. It also permits ADs to enter into non-deliverable contracts with non-bank entities. 

Liquidity Norms 

Separately, the RBI has consolidated norms on deployment of surplus foreign currency funds. Subject to a board-approved policy, ADs may undertake overnight placements, reverse repos of up to 1 year against overseas sovereign debt, and investments in overseas money market or sovereign instruments with maturities of up to 1 year. 

Undeployed FCNR (B) funds may be invested in long-term overseas sovereign debt, subject to residual maturity conditions. Lending in rupee or foreign currency may continue in line with the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. 

Read More: Santam Re Expands into GIFT City to Drive Reinsurance Growth Across India and Asia! 

Conclusion 

RBI’s proposal outlines who can undertake NDDCs and under what safeguards. It connects offshore trading eligibility with an IFSC presence. The draft remains subject to consultation. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal 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.   
 
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.