Justifying the recent norms on exchange-traded currency derivatives, the Reserve Bank of India Deputy Governor Michael Patra said that the relaxation in documentary evidence requirements is being misused by some market participants as implying a lack of underlying exposure, which is incorrect and constitutes a violation.
He said that the RBI’s policy on foreign exchange risk management has stayed consistent in recent years, maintaining an unchanged approach. In 2008, when exchange-traded currency derivatives (ETCDs) debuted, they functioned under the Foreign Exchange Management Act. FEMA regulations explicitly outlined that ETCDs are designed exclusively for hedging purposes, indicating the imperative of having an underlying exposure.
The Reserve Bank of India (RBI) on Thursday deferred the implementation of norms on exchange-traded currency derivatives (ETCDs) linked to the Indian rupee until May 3, following concerns by investors. The norms were scheduled to take effect starting Friday. Now, rupee-denominated currency contracts traded on the National Stock Exchange (NSE) and the BSE require underlying exposure. Though traders are not required to provide evidence of underlying exposure for positions up to $100 million, they must confirm the existence of such exposure.
Supplementing Deputy Governor Patra, RBI Governor Shaktikanta Das reiterated that there have been no changes to RBI’s policy, emphasising that the necessity of underlying exposure has always been a fundamental aspect. He clarified that the reasons behind the issuance of recent circulars and the extension of implementation deadlines were in response to market feedback and requests for more time.
“There is no change pursuant to yesterday’s (Thursday) circular or even earlier. There has been no change in RBI’s policy. This policy of needing to have an underlying has always been a part of RBI’s policy for the last so many years, so there was no change. And this is something that every market player knew. You cannot say that this is something new. If you read the circulars, past circulars very carefully, it has always been there. So, therefore, if somebody says it is new, it is not correct,” he said.
Transactions in currency futures were primarily driven by the retail segment who couldn’t transact in OTC markets because banks demanded proof of underlying exposure, which they didn’t have. These retail trades accounted for more than 50 per cent of total transactions and contributed significantly to liquidity in exchange-traded currency futures.
“Majority markets require both segments of participants, the commercials and non-commercials. Even in the overseas market, there is a huge chunk of non-commercials,” said Hitesh Jain, strategist, institutional equities research, YES Securities India. “I really can’t really read too much what the RBI members are trying to convey, but I can say there is a need for both segments of the market,” he added.
There was significant volatility in the rupee’s exchange-traded derivatives in the current week as brokers advised their clients to either unwind positions or provide evidence of underlying forex exposure.
“In the earlier regulation, as DG Patra has said, that provision was there, but there was no cut-off date,” said Ritesh Bhansali, vice-president at Mecklai Financial Services. “The RBI wanted to ensure there was no excess speculation and they came up with the cut-off date,” he added.
First Published: Apr 05 2024 | 8:28 PM IST