The apex bank says the regulatory framework for participation in ETCDs involving the Indian rupee (INR) is guided by the provisions of the Foreign Exchange Management Act (FEMA), 1999. The rules framed under this law mandate that currency derivative contracts involving the INR – both over-the-counter (OTC) and exchange-traded – are permitted only for "hedging" of exposure to foreign exchange rate risks, the RBI says.

It says the regulatory framework in the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000, also says a person may enter into an ETCD contract involving the INR only for the "purpose of hedging a contracted exposure".

The RBI's June 20, 2014, circular had emphasised on the ease of doing business, which permitted users of ETCDs to take positions up to $10 million per exchange without having to provide documentary evidence to establish the underlying exposure but did not provide any exemption from the requirement of having the exposure. Accordingly, users were expected to ensure compliance with the requirement of having underlying exposure. The limit of $10 million per exchange was subsequently amended to a single limit of $100 million combined across all exchanges.

The RBI's Developmental and Regulatory Policies on December 08, 2023, stated the regulatory framework governing the hedging of foreign exchange risks was comprehensively reviewed to usher in a principle-based regime. Based on this review, public consultations, feedback received from market participants and experience gained since then, the regulatory framework was made more comprehensive in respect of all types of transactions – OTC and exchange-traded - under a single master direction to enhance operational efficiency and ease access to foreign exchange derivatives.

The latest directions issued by the RBI on January 05, 2024, set out these master directions and reiterated the regulatory framework for participation in ETCDs involving the INR without any change. Accordingly, participants with a "valid underlying contracted exposure" can continue to enter into ETCDs involving the INR up to a limit of $100 million, without having to produce documentary evidence of the underlying exposure, says the RBI.

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