India's central bank tightens currency-derivative rules as reserves fall

The Reserve Bank of India introduced additional requirements for foreign-exchange derivatives and restricted transactions without evidence of underlying exposure. The measures were announced on October 10 amid pressure on the rupee and falling currency reserves.

Times of India reported that reserves fell from $785.7 billion on September 4 to $734 billion on October 2, a decline of almost $52 billion. The rupee lost about 40 paise during October to reach 96.73 per dollar.

The new foreign-exchange risk reserve is 20% of the rupee equivalent of a qualifying contract's notional amount. The published circular applies it to derivatives above $2 million that hedge current-account transactions in which a customer purchases foreign currency against rupees.

Banks must hold that reserve with the central bank until the contract ends. Splitting transactions to avoid the threshold is prohibited. The requirement concerns specified derivatives rather than every dollar purchase.

The regulator also barred rebooking cancelled contracts and reduced the threshold for trading without proof of underlying exposure from $100 million to $5 million. Banks must obtain additional documentation and undertakings against duplicate hedging.

A separate facility will supply dollars to IndianOil, HPCL and BPCL for crude imports through direct currency sales. Times of India linked pressure on the rupee to oil prices, foreign-investor outflows and a stronger dollar.