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The Reserve Bank of India (RBI) has introduced a requirement for authorised dealers to maintain a Foreign Exchange Risk Reserve (FERR) for foreign exchange derivative contracts involving the Indian rupee (INR) undertaken with users. The measure aims to ensure the orderly functioning of the foreign exchange market.
Under the revised directions, the reserve will apply to foreign exchange derivative contracts involving the Indian rupee with a notional value exceeding the equivalent of USD 2 million, undertaken to hedge current account transactions where the user purchases foreign currency against the Indian rupee. Contracts covered by these conditions will be subject to the new reserve requirement.
The Foreign Exchange Risk Reserve will be equal to 20 per cent of the rupee equivalent of the notional amount of each eligible derivative contract. Authorised dealers will be required to deposit and maintain this amount in cash in India with the RBI on a daily basis. The reserve must remain with the central bank until the relevant derivative contract is terminated.
The RBI has also clarified that users cannot avoid the reserve requirement by splitting their transactions into multiple smaller transactions with one or more authorised dealers. Any attempt to circumvent the requirement through such transactions will be treated as a violation of the directions.
Authorised dealers must report details of the Foreign Exchange Risk Reserve maintained by them on a daily basis through the RBI’s Centralised Information Management System (CIMS). This reporting requirement will help the RBI monitor compliance with the new rules.
The directions will apply to foreign exchange derivative contracts undertaken after their issuance. The RBI has issued these directions under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999, and Section 45W of the Reserve Bank of India Act, 1934. The directions do not affect any other permissions or approvals that may be required under applicable laws.
