RBI Proposes Greater Forex Flexibility for Authorised Dealers in Draft Directions
The Reserve Bank of India (RBI) on Tuesday unveiled draft directions aimed at significantly enhancing the operational flexibility for authorised persons in foreign exchange dealings. This move follows a comprehensive review of existing regulations and seeks to streamline transactions for hedging exposures, balance sheet management, and market-making activities.
Expanded Scope for Hedging and Market-Making
Under the proposed framework, authorised banks and standalone primary dealers will enjoy a wider scope to access the foreign exchange market. Specifically, the draft permits authorised dealers to engage in permitted foreign exchange transactions with other authorised dealers for purposes such as hedging their exposures, managing balance sheets, facilitating market-making, and maintaining proprietary positions.
Additionally, the draft introduces provisions allowing authorised dealers to borrow and lend in foreign currency, further broadening their financial toolkit. A notable inclusion is the permission for authorised dealers to undertake non-deliverable derivative contracts (NDDCs) involving the Indian rupee with other authorised dealers.
The draft also emphasises the use of electronic trading platforms (ETPs) authorised by the RBI, stating, "An authorised dealer may undertake foreign exchange derivative contracts and foreign currency interest rate derivative contracts on electronic trading platforms (ETPs) authorised by the Reserve Bank." Stakeholders have been invited to submit comments on these draft directions by March 10.
Trading on Overseas Platforms with Safeguards
In a significant development, the draft permits authorised dealers to conduct transactions on electronic trading platforms located outside India, subject to stringent conditions. One key requirement is that the ETP operator must be incorporated or established in a country that is a member of the Financial Action Task Force (FATF), ensuring compliance with international anti-money laundering standards.
Gold Hedging Provisions
The draft directions also address gold-related transactions, providing specific guidelines for designated banks. Under the Gold Monetisation Scheme, 2015, and for banks allowed to enter into forward gold contracts with constituents in India, the draft permits hedging of gold price risk using exchange-traded and over-the-counter (OTC) hedging products in overseas markets.
The draft cautions, "While using products involving options, the bank may ensure that there is no net receipt of premium, either direct or implied," to maintain financial prudence. Authorised persons under this framework include authorised dealer category-I banks and certain standalone primary dealers, who are expected to benefit from these enhanced operational freedoms.
Overall, the RBI's draft directions aim to modernise foreign exchange dealings by providing greater autonomy while ensuring robust safeguards, thereby fostering a more dynamic and secure financial environment in India.
