RBI Tightens Forex Derivative Rules, Cuts Exposure Limit to $5 Million

The Reserve Bank of India announced stricter regulations for foreign exchange derivatives on October 10, aimed at maintaining orderly functioning of the forex market amid changing conditions. The central bank restricted the rebooking of cancelled rupee-linked contracts and lowered transaction limits for positions taken without establishing underlying exposure.

Authorised dealers can no longer permit customers to rebook rupee-linked foreign exchange derivative contracts cancelled after the new directions, covering both deliverable and non-deliverable contracts. However, existing contracts can still be rolled over upon maturity under current regulatory conditions. The RBI reduced the threshold for undertaking certain forex derivative transactions without underlying exposure from $100 million to $5 million across all authorised dealers. The same $5 million cap applies to exchange-traded currency derivatives involving the rupee across all recognised stock exchanges combined.

To prevent multiple hedges against the same exposure, authorised dealers must obtain customer undertakings confirming the underlying exposure has not been hedged elsewhere. The central bank also introduced a Foreign Exchange Risk Reserve (FERR) requirement, mandating authorised dealers maintain a 20% cash reserve with the RBI for specified rupee-linked derivative transactions.