RBI allows foreign portfolio investors to hedge currency risks

The Reserve Bank has relaxed norms for banks' proprietary positions

The Reserve Bank of India (RBI) has set a limit of $10 million on banks’ proprietary positions in exchange-traded currency derivatives (ETDC) and has allowed foreign portfolio investors (FPIs) to hedge their currency risks without any underlying exposure up to the same limit. According to currency dealers this move will help to bring about more liquidity in the market.

In July, RBI had barred all banks from taking any proprietary positions in the currency futures market.

According to RBI, FPIs cannot take a short position beyond $10 million at any time and to take a long position beyond $10 million in any exchange, it will be required to have an underlying exposure. “The onus of ensuring the existence of an underlying exposure shall rest with the FPI concerned,” said RBI.

RBI also said domestic participants who want to take a position exceeding $10 million in the ETDC market will have to establish the existence of an underlying exposure.

RBI allowed FPIs to access the currency futures or exchange traded currency options for the purpose of hedging the currency risk arising out of the market value of their exposure to Indian debt and equity securities. “Such investors can participate in the currency futures/exchange traded options market through any registered/recognised trading member of the exchange concerned,” said the regulator.

RBI, however, said the exchange will be free to impose additional restrictions as prescribed by the Securities and Exchange Board of India (Sebi) for the purpose of risk management and fair trading.