India’s RBI limits rupee NDF use and imposes a 20% reserve

what happened

Newsmetry API reported that the Reserve Bank of India (RBI) tightened rules on rupee non-deliverable derivatives on Monday. Overseas clients may now use these instruments solely to hedge exposure. The central bank also extended a 20% cash-reserve rule to banks’ own rupee currency hedges.

Banks with units in India’s International Financial Services Centre and certain primary dealers had previously been able to offer non-deliverable rupee derivatives to non-residents for any purpose. That access is now limited to hedging. Authorised dealers must also create a foreign-exchange risk reserve for rupee-linked derivative trades used to protect their own assets and liabilities from currency risk.

The reserve covers every rupee contract in which an authorised dealer purchases foreign currency for rupees. It equals 20% of each contract’s notional value translated into rupees, must be placed with the RBI in cash every day and remain there until expiry. Reuters reported earlier on Monday that banks had asked the RBI to replace the deposit on FX derivatives hedging current-account exposures with a flat charge. The rupee, down more than 6% this year, gained 1% on Monday after the RBI’s weekend announcements. These non-deliverable trades are cash-settled, generally in dollars, with no rupees exchanged.

why it matters

The latest steps are part of measures announced since Saturday to support the rupee amid steep oil prices and capital outflows. They may raise the cost of some bank hedges.

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