RBI Expands Forex Risk Reserve Scope, Tightens NDF Rules
The Reserve Bank of India (RBI) has widened the scope of its 20% Foreign Exchange Risk Reserve (FERR) requirement and tightened rules governing non-deliverable foreign exchange derivatives, as part of measures aimed at managing pressure on the Indian rupee.
The FERR requirement, initially introduced for certain foreign-exchange derivatives used by bank customers to hedge current-account exposures, will now cover all rupee-involved FX derivative contracts undertaken by authorised banks when purchasing foreign currency against the rupee. The requirement also covers transactions used by banks to hedge their own assets and liabilities.
The measure is expected to increase the cost of currency hedging. Bankers have indicated that higher reserve requirements could discourage excessive hedging demand, although they may also raise costs for genuine corporate hedgers. Some estimates suggest hedging costs could increase by around 1% to 1.6%.
The RBI has simultaneously restricted the use of non-deliverable rupee derivatives (NDFs) by banks and primary dealers operating from the International Financial Services Centre. These instruments can now be offered to non-residents only for hedging purposes, rather than speculation.
The measures come amid pressure on the rupee from high oil prices and capital outflows. Following the RBI’s broader measures, the rupee gained about 1% on Monday.
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