The Reserve Bank of India (RBI) has proposed important changes in the rules related to foreign exchange transactions. The central bank has issued draft guidelines on ‘Foreign Exchange Transactions by Authorized Persons’ after reviewing the existing provisions and invited suggestions from stakeholders by March 10. RBI aims to give authorized persons greater operational flexibility in functions such as hedging, balance sheet management and market making, while also reducing the complexities associated with reporting.
What are the proposed changes?
- Authorized Dealers will now be able to undertake permitted foreign exchange transactions with other Authorized Dealers, enabling better hedging of their exposures, balance sheet management and handling of proprietary positions.
- They will be allowed to borrow and lend in foreign currency, which is expected to increase liquidity in the market.
- Authorized dealers will also be able to enter into rupee linked non-deliverable derivative contracts (NDDCs) with other authorized dealers.
- Foreign currency derivatives and foreign currency interest rate derivative contracts will be permitted to be executed on electronic trading platforms (ETPs) recognized by the RBI.
- Under certain conditions, transactions will also be possible on ETPs located outside India, provided the concerned country is a member of the Financial Action Task Force i.e. FATF.
Relief to Gold Monetization Scheme also
According to the draft, banks designated under the Gold Monetization Scheme, 2015 and those banks which are permitted to enter into forward gold contracts with customers in India will be able to hedge gold price risk through exchange-traded and over-the-counter (OTC) products in overseas markets. However, when using option-based products it must be ensured that there is no net receipt of premium in any form.
RBI has clarified that ‘authorised person’ includes authorized dealer category-I banks and certain independent primary dealers. According to experts, these proposals can prove to be an important step towards making the foreign exchange market more competitive, transparent and efficient.
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