RBI extends forex risk reserve requirement to banks' own hedging contracts

The Reserve Bank of India (RBI) has extended the foreign exchange risk reserve (FERR) requirement to rupee derivative contracts undertaken by authorised dealers to hedge currency risks on their own assets and liabilities. Unlike the existing reserve requirement on contracts with users, which applies only above a notional value of $2 million, the new directions specify no threshold.

Under the revised directions, authorised dealers will have to maintain a reserve equivalent to 20 per cent of the rupee value of the notional amount of each eligible derivative contract in which they purchase foreign currency against the rupee. The reserve will have to be deposited in cash with the RBI daily and maintained until the contract is terminated.

The existing FERR requirement applies to rupee derivative contracts undertaken with users for hedging current account transactions, provided the notional value exceeds the equivalent of $2 million and the user is purchasing foreign currency against the rupee. Those directions also treat attempts by users to circumvent the threshold by splitting transactions across one or more authorised dealers as a violation.

Separately, the central bank has restricted the use of non-deliverable derivative contracts (NDDCs) involving the rupee offered to non-residents to hedging purposes. Previously, authorised dealer Category-I banks with an operating IFSC Banking Unit and standalone primary dealers authorised as Category-III dealers could offer such contracts to non-residents without any restriction on purpose.

The revised directions will apply to foreign exchange derivative contracts undertaken after their issuance.

The latest changes follow a series of measures announced by the RBI over the weekend to curb dollar demand and support the rupee, which has been under pressure from elevated crude oil prices and foreign capital outflows.

On Saturday, the central bank announced a special window to meet the entire daily dollar requirements of state-run oil marketing companies Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. The facility, which became operational on Monday, is intended to divert their dollar purchases away from the spot market.

The RBI also tightened rules for foreign exchange derivatives. It lowered to $5 million from $100 million the threshold for users to hedge contracted exposures without establishing the underlying exposure, as well as the single limit for positions across all currency pairs involving the rupee and across recognised stock exchanges. It also barred users from rebooking contracts cancelled with any authorised dealer and required dealers to obtain an undertaking that the same exposure had not been hedged with another dealer.