RBI allows foreign investors to access currency futures

21 June 2014

The Reserve Bank of India (RBI) has allowed foreign portfolio investors to access the currency futures market for hedging their currency risks while also partially reversing the restrictions put last year on banks proprietary trading in exchange traded currency futures.

The move to allow foreign portfolio investors to participate in the currency futures market will help attract dollar inflows into the country while helping FPIs to hedge onshore currency risks arising out of their exposure to the Indian debt and equity markets, RBI said on Friday.

The RBI also allowed foreign portfolio investors participating in the currency futures market to take long or short positions to the extent of $10 million without having to establish any underlying exposure.

''A foreign portfolio investor cannot take a short position beyond $10 million at any time and to take a long position beyond $10 million in any exchange, it will be required to have an underlying exposure,'' RBI said in a release.

The central bank said the responsibility of ensuring the existence of the underlying exposure will rest with the foreign investor.

The exchange will, however, be free to impose additional restrictions as prescribed by the Securities and Exchange Board of India (SEBI) for the purpose of risk management and fair trading, RBI said.

RBI said in a statement, "The exchange / clearing corporation will provide FPI wise information on day-end open position as well as intra-day highest position to the respective custodian banks. The custodian banks will aggregate the position of each FPI on the exchanges as well as the OTC contracts booked with them (ie, the custodian banks) and other AD banks.

"If the total value of the contracts exceeds the market value of the holdings on any day, the concerned FPI shall be liable to such penal action as may be laid down by the SEBI in this regard and action as may be taken by Reserve Bank of India under the Foreign Exchange Management Act (FEMA), 1999. The designated custodian bank will be required to monitor this and bring transgressions, if any, to the notice of RBI / SEBI."

In July last year, at the peak of the rupee crisis, the central bank had barred all banks from taking any proprietary positions in the currency futures market.

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