RBI raises ETCD trading limit to $100 million

Reserve Bank of India (RBI) has raised exposure limit under exchange traded currency derivatives (ETCD) trading for residents and foreign portfolio investors (FPIs) to $100 million across all currency pairs involving Indian rupee. This decision aims to help entities engaged in forex transactions to maintain their currency risks in better manner. Earlier, the limit was of $15 million for US Dollar-Rupee and $5 million for other currency pairs of Indian rupee with Japanese Yen, Euro and British Pound.

Exchange Traded Currency Derivatives (ETCD)

ETCD is financial instrument that trades on regulated exchange, and whose value is based on value of another asset. These derivatives are traded in a regulated fashion. They can be used to hedge exposure or speculate on wide range of financial assets like commodities, currencies, equities and even interest rates.

What are new norms?

The raised exposure limit permits persons resident in India and FPIs to take positions (long or short), without having to establish existence of underlying exposure, up to single limit of $100 million equivalent across all currency pairs involving Indian rupees, put together, and combined across all exchanges.
The onus of complying with provisions of this decision rests with participant in ETCD market. In the case of any contravention participant will be liable to any action that may be warranted as per provisions of Foreign Exchange Management Act (FEMA), 1999 and regulations, directions, etc. issued there under. These limits shall also be monitored by exchanges, and breaches, if any, may be reported to RBI.

Background

RBI has taken series of liberalisation measure in the ETCD market. Earlier it had relaxed documentation requirement for such trades i.e. allowed signed undertaking instead of the statutory auditor’s certificate. It also had allowed importers to take appropriate hedging positions up to 100% of eligible limit to bring at par both exporters and importers the RBI. Prior to it, importers were permitted to hedge their contracted exposures in ETCD market only up to 50% of their eligible limit.

Month: Current Affairs - February, 2018