RBI Says Exchange-Traded Currency Derivatives Were 'Misused' By Some

The Reserve Bank of India reiterated that there is no change in norms related to exchange-trade rupee derivatives, while underlining regulations under Foreign Exchange Management Act, 1999.

"This is something which every market player knew ... If you read the past circulars very carefully, it has been always there. So, therefore, if somebody says it is new, it is not correct," Governor Shaktikanta Das said in the post-policy media briefing on Friday.

On Jan. 5, the RBI had reinstated that users can take positions of up to $100 million without having to provide documentary evidence to establish the underlying exposure to hedge.

Nevertheless, users are expected to ensure compliance with the requirement of having underlying exposure, the central bank said in a clarification issued on its website on Thursday.

Some market players were "misusing" a leeway from 2014 of not having to provide documentary evidence of underlying exposure, RBI Deputy Governor Michael Patra said.

To put in context, the central bank had relaxed norms on exchange-trade rupee derivatives to promote ease of doing business in 2014. It stated that while users must have underlying unhedged exposure to engage in rupee futures market, for up to $10 million of that exposure, users need not establish documentary evidence, Patra said.

Over the next few years, this limit was raised to $100 million "to provide an incentive for market turnover and expand size of the market", he said.

Having said that, the regulations of FEMA clearly stated that transacting in exchange-traded currency derivatives must be used for hedging purposes only, the deputy governor said. "The moot point is that it is only for hedging and underlying exposure is a mandatory requirement."

"Some market participants have been misusing this to understand that relaxation in documentary evidence is tantamount to no underlying (exposure) which is not the case and that is violation of the law," Patra said.

Das supplemented Patra's response, saying the reference in implementation of the norms to May 3 was based on several requests from market players "that they need more time."