Reserve Bank of India deputy governor Michael Patra, while reiterating the regulator’s position on currency derivatives, said there was no provision for trading in currency derivatives without the existence of underlying exposure.
However, given that there was no requirement for documentary evidence on the underlying hedge of up to $100 million, it could have been misused by some market participants.
“Some market participants have been misusing this to mean a relaxation in documentary evidence is tantamount to no underlying, which is not the case, and which is a violation of the law,” Patra said in the post-policy media briefing.
The RBI on Thursday delayed the implementation of its consolidated directions for exchange-traded currency derivatives by a month, as traders rushed to exit unhedged positions ahead of the measure which were supposed to kick in from Friday.
Market participants say the move will dry up volume in the derivatives market as proprietary traders and individual investors comprise the bulk of the market. Open interest in rupee derivatives on the National Stock Exchange more than halved to 3.5 million this week.
The Reserve Bank in 2014 allowed traders to take positions of up to $10 million, which was later raised to $100 million, without having to provide evidence on the underlying hedge.
RBI governor Shaktikanta Das said there was no change in central bank’s policy on exchange-traded currency derivatives (ETCDs) and reiterated that underlying foreign exchange exposure is necessary for transacting in rupee derivatives on the exchanges.
“There has been no change in the RBI’s policy. This policy of need to have an underlying has always been a part of the RBI’s policy for many years,” Das said in the post-policy media briefing on Friday. “Because of the request that we received from several from market players that they need more time, we extended the time for the implementation of the January 5 circular.”
The central bank has also allowed small finance banks (SFBs) to use rupee derivative products to hedge interest risks. So far, small finance banks were permitted to use only interest rate futures for hedging. The central bank will shortly release a circular in this regard.
“We welcome the regulatory announcement of allowing SFBs to utilize rupee interest derivative products for hedging interest rate risks as this will impart greater flexibility for our hedging operations and help boost the balance sheet resilience,” said Sanjay Agarwal, founder, MD and CEO, AU Small Finance Bank.