Currency guardrails: RBI tightens forex derivatives rules for banks amid rupee volatility

The Reserve Bank of India on Wednesday announced fresh restrictions on authorised dealers (ADs) in the foreign exchange market following a “review of evolving market conditions”, as the rupee remains under pressure, according to PTI.In a late-evening notification, the central bank said ADs — banks authorised to deal in foreign exchange — will not be allowed to offer non-deliverable derivative contracts involving the Indian rupee to resident or non-resident users with immediate effect.However, banks can continue to offer deliverable foreign exchange derivative contracts to users for hedging purposes, provided users do not take offsetting non-deliverable derivative positions.The RBI also barred rebooking of derivative contracts after cancellation.“The ADs should not permit a user to rebook any foreign exchange derivative contract, whether deliverable or non-deliverable, which is cancelled after the date of issuance of these instructions,” the notification said.Banks have been asked to seek necessary documents or information from users to ensure compliance with the new rules.Further tightening norms, the RBI said ADs should not undertake any foreign exchange derivative contract with their related parties, clarifying that the definition of related parties will follow accounting standards such as Ind AS 24 or IAS 24.The measures come after the rupee breached the key Rs 95 per US dollar mark in intra-day trade earlier this week, highlighting rising volatility in the currency market.Over the weekend, the RBI had also capped net open positions of ADs in the rupee at USD 100 million, effective April 10, a move that briefly supported the currency in early trade before it pared gains.The forex market is set to reopen on Thursday after a two-day break.