'No change in RBI’s policy on exchange traded currency derivatives': Governor Shaktikanta Das

Reserve Bank of India Governor Shaktikanta Das on Friday said that there is no change in central bank’s policy on exchange-traded currency derivatives as such. He said the central bank has extended the deadline for implementation of currency derivatives circular due to requests from several market participants.

On Thursday, the RBI deferred implementation of its new rules on exchange-traded rupee derivatives by almost a month, highlighting that its policy on this issue has remained unchanged over the years.

Explaining it further, Governor Das on Friday said: "There is no change in RBI’s policy on exchange traded currency derivatives. Some market participants misusing relaxation in documentary evidence for interest rate currency derivatives as tantamount to no underlying, which is not the case and a violation of the law. The deadline for implementation of currency derivatives circular was extended due to requests from several market participants."

In the same press conference, Deputy Governor Michael Debabrata Patra said: "RBI’s policy on forex risk management has remained consistent over the last few years and there is no change in the policy approach."

Currency derivatives traded on exchanges are regulated by RBI and SEBI. In addition to currency derivatives, exchanges also provide equities, interest rate derivatives, and commodity derivatives.

The RBI’s January 5 circular stated proprietary traders and retail investors are required to demonstrate contracted or prospective currency exposure to participate in the currency derivatives segments provided by exchanges such as the NSE and the BSE.
 
The RBI said the regulatory framework for participation in ETCDs involving the rupee is guided by the provisions of the Foreign Exchange Management Act (FEMA), 1999, and regulations framed thereunder, which mandate that currency derivative contracts involving rupee — both over-the-counter (OTC) and exchange-traded — are permitted only for the purpose of hedging of exposure to foreign exchange rate risks.

The norms, the RBI said, reiterated the regulatory framework for participation in ETCDs involving the rupee without any change.   

As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDs involving the rupee up to a limit of $100 million without having to produce documentary evidence of the underlying exposure.

“Thus, it is emphasised that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI’s policy approach,” the April 4 press release said. 

The forex market has seen an increase in volatility due to the April 5 deadline. On Wednesday, the rupee closed at a record low of 83.44 against the US dollar. The domestic currency ended flat on Thursday. Some market participants said that the RBI new rules will reduce the speculators from the market. 

“The new guidelines on hedging of foreign exchange risk will reduce the speculated activity and the number of players on the currency exchanges. It may lead to dry up of liquidity in the currency pairs on the exchanges. However, the market continues to be available for the players having the valid contracted exposure within the $100 million limit. For genuine hedgers, there will be no impact,” V R C Reddy, Head Treasury, Karur Vysya Bank, said on Thursday.