Home / Business and Economy / RBI Clarifies Rupee Support Measures Amid Market Unrest
RBI Clarifies Rupee Support Measures Amid Market Unrest
16 Oct
Summary
- RBI clarified hedging rules to calm market after recent measures.
- New rules impact derivative contracts for hedging, not all transactions.
- FERR requires a 20% reserve on specific foreign exchange derivative contracts.
The Reserve Bank of India (RBI) provided much-needed clarification on its recent foreign exchange measures, seeking to quell market anxieties. These recent actions, which included stricter hedging regulations and cash-margin requirements on certain derivatives, had introduced significant uncertainty. Lenders had paused dollar-rupee forward quotes due to confusion over the applicability of margin requirements.
The RBI clarified that the foreign exchange risk reserve (FERR) requirements apply to specific derivative contracts used for hedging current account transactions and for banks hedging their own assets or liabilities. However, these requirements will not affect market-making or proprietary trading transactions, nor will they apply to hedging overseas loan interest or principal repayments.
The reserve requirement mandates that authorized dealers maintain a reserve equal to 20% of the INR-equivalent notional amount for applicable derivative contracts. This reserve must be deposited in the authorized dealer's current account with the RBI. The central bank also specified how to calculate reserves for derivative contracts involving multiple options, using the largest individual option's notional value towards a $2 million threshold determination and FERR calculation.
