NEW DELHI: The Reserve Bank of India has tightened regulations governing foreign exchange derivatives, mandating that authorised dealer banks maintain cash reserves against eligible rupee-linked hedging transactions undertaken for their own balance sheets. The intervention comes amid sustained depreciation pressure on the domestic currency, which has faced headwinds from elevated crude oil prices and continuous capital outflows by foreign investors. Under the revised directions, commercial lenders must park daily cash deposits with the central bank for internal hedging operations, while access to rupee-linked non-deliverable derivative contracts for non-resident entities has been strictly confined to hedging activities.
Mandatory 20 Per Cent Daily Cash Reserve Expanded to Bank Books
Under the updated regulatory framework, authorised dealers must maintain a Foreign Exchange Risk Reserve equivalent to 20 per cent of the rupee value of the total notional amount for each eligible derivative transaction where foreign currency is purchased against the rupee. The stipulated sum must be deposited with the central bank in cash on a daily basis and maintained throughout the duration until the underlying contract reaches maturity. Unlike the previous regime, which applied reserve obligations solely to customer current-account hedging deals exceeding a notional threshold of 2 million dollars, the revised mandate prescribes no minimum transaction size and explicitly encompasses proprietary risk-management deals conducted by banks for their own assets and liabilities.
The banking regulator has also barred market participants from circumventing the reserve requirement through structural adjustments. Splitting larger transactions into multiple smaller tranches across one or more authorised dealers will be treated as an explicit regulatory violation, ensuring that capital commitments are not avoided through fragmented dealing.
Strict Curbs Imposed on Non-Residents and Unbacked Exposures
To curb speculative positioning and tighten trading discipline, the central bank has revised rules for non-resident market participants. Category-I banks operating in International Financial Services Centres and Category-III independent primary dealers, who previously offered rupee-linked non-deliverable derivative contracts to foreign entities without purpose restrictions, may now do so only if the transactions serve verifiable hedging needs. Furthermore, the revised framework applies directly to all derivative contracts executed following the release of the amended operational circular.
Simultaneously, the central bank reduced the allowable limit for domestic customers hedging without establishing underlying exposure from 100 million dollars down to 5 million dollars. This reduced 5 million dollar ceiling also applies as a single aggregate limit across all recognised stock exchanges and rupee-linked currency pairs. Under the revised norms, corporate hedgers are barred from rebooking contracts that have been cancelled with an authorised dealer. Financial institutions are now required to secure explicit written declarations from clients confirming that the specified risk exposure has not been hedged through another banking channel.
Coordinated Measures Rolled Out to Contain Forex Market Volatility
The derivatives overhaul follows several emergency measures rolled out by the central bank over the weekend to insulate the foreign exchange market from concentrated dollar outflows. On Saturday, the authority established a dedicated window to service the full daily dollar requirements of state-run oil marketing companies, including Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation. Becoming operational on Monday, the dedicated mechanism routes major fuel import settlements away from the spot market to relieve pressure on the interbank exchange rate.
Market participants, including commercial lenders and corporate treasuries, will need to commit substantial additional liquidity and overhaul dealing strategies to satisfy the daily reserve requirements. The broader market consequences will depend on how institutions recalibrate execution practices and capital allocation under the strengthened oversight regime.
Follow for daily updates on cybercrime, corporate fraud, DFIR, hacking, investigations, and digital forensics
