RBI delays implementation of currency derivatives trading norms

Reserve Bank of India (RBI) has pushed back the implementation of its directions on currency derivatives trade from 5 April to 3 May 2024, in view of the negative feedback received from market participants and the volatility in rupee-dollar exchange rate.

RBI has directed that participants declare any underlying position in the exchange traded currency derivatives (ETCD) market, even if it is for a single lot, or square-off all the positions. This caused discomfort for foreign portfolio investors who participate in the currency derivatives market without having any open positions.

FPIs usually give directions to their banks to release rupee funds without having to provide the necessary proof of exposure to the debt or equity instruments in India. They also enjoy the privilege of directing banks to release rupee funds without having to provide necessary forex cover.   

As per RBI’s directions, FPIs may have to square positions where there is no underlying exposure, starting 3 May.

FPIs have been enjoying the facility of participating in exchange-traded currency derivatives (ETCD), which gave them the freedom to take long and short positions in all currency pairs, up to a limit of $100 million, on the stock exchanges. 

It was also not necessary for them to establish underlying exposure to any equity or debt instruments for trading in currency derivatives.

While there is no change in RBI’s policy, the new rules will make it mandatory for FPIs as well as foreign brokers engaging in high frequency trade without any underlying positions to square off their positions.

RBI permits hedging in the currency derivatives market — both over-the-counter (OTC) and exchange traded — but the market is controlled by speculators.  Hedgers in the market are limited to exporters and importers and FPIs to a certain extent. Banks and brokers act as market makers.

RBI said the regulatory framework for participation in ETCDs involving the Indian rupee is governed by the provisions of the Foreign Exchange Management Act (FEMA), 1999

Rupee-denominated currency contracts are traded on the National Stock Exchange (NSE) and the BSE. While traders are not required to provide evidence of underlying exposure for positions up to $100 million, they must confirm the existence of such exposure.

RBI reiterated that the regulatory framework for participation in ETCDs involving the rupee will continue without any change.