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The Reserve Bank of India has mandated foreign banks limit themselves to placing hedging-related trades on onshore forward markets on behalf of clients, and not using existing client positions to make other trades, such as proprietary trading.
Foreign banks will also need to verify that any hedging-related trades by their clients line up with the value of securities held by that client's account.
Dealers say the move will reduce demand for forward dollars and cut speculative trades, although they note the impact would be limited since foreign investors can bypass onshore markets and take positions in the offshore rupee market.
"I don't see this as a major step to protect the rupee," says a senior dealer with a foreign bank.
The RBI has also been asking banks about flows, open intraday positions in the FX market, dealers say.
Separately, RBI is also easing overseas borrowing rules to ensure greater inflows, allowing importers to now also use these external commercial borrowings to pay for proceeds for import of services, technical know-how and payment of license fees.
