RBI Tightens Rules for INR Derivative Contracts, Cuts Position Limits to USD 5 Million

The Reserve Bank of India (RBI) has introduced changes to the rules governing foreign exchange derivative contracts involving the Indian rupee (INR). The revised directions aim to strengthen risk management and improve compliance in the foreign exchange market. The changes cover the cancellation and rebooking of derivative contracts, limits for taking positions without providing proof of underlying exposure, and additional documentation requirements for users.

Under the new rules, authorised dealers will not be allowed to permit users to rebook any foreign exchange derivative contract involving the Indian rupee, whether deliverable or non-deliverable, if the contract was cancelled with any authorised dealer after the issuance of these directions. However, authorised dealers may continue to allow users to roll over foreign exchange derivative contracts on their maturity, provided they comply with the applicable provisions of the RBI’s Master Direction on Risk Management and Inter-Bank Dealings.

The RBI has also reduced the threshold for taking certain foreign exchange derivative positions without the requirement to establish the existence of underlying exposure. Earlier, authorised dealers could allow users to take positions of up to USD 100 million equivalent in notional value, outstanding at any point in time across all authorised dealers, for hedging contracted exposure without having to establish the underlying exposure. Under the revised directions, this limit has been reduced to USD 5 million equivalent.

Similarly, the limit for taking long or short positions without establishing underlying exposure across all currency pairs involving the Indian rupee, combined across all recognised stock exchanges, has also been reduced from USD 100 million to USD 5 million equivalent of notional value outstanding at any point in time. These changes significantly lower the thresholds available to users under both facilities.

The RBI has also introduced an additional documentation requirement for authorised dealers offering foreign exchange derivative contracts involving the Indian rupee to hedge contracted exposure. At the time of entering into such a contract, authorised dealers must obtain and retain an undertaking from the user confirming that the same underlying exposure has not been hedged with any other authorised dealer. If the user is hedging the same exposure in parts through more than one authorised dealer, the undertaking must clearly mention the amounts already booked with the other authorised dealers. The undertaking may also be obtained as part of the deal confirmation and will be required in addition to other documents that authorised dealers may request under the existing rules.

The responsibility for ensuring compliance with these directions rests with the authorised dealers. They must verify the existence of the underlying exposure, obtain the necessary supporting documents and retain those documents for at least two years.

The revised directions have come into force with immediate effect. The RBI has issued them 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.

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