(Bloomberg) -- India’s central bank pushed back the implementation of its rules on exchange-traded currency derivatives by about a month, after the me
(Bloomberg) — India’s central bank pushed back the implementation of its rules on exchange-traded currency derivatives by about a month, after the measure stoked fears about drying up volumes that reached $5 billion-a-day.
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The Reserve Bank of India, in its clarification on Thursday, reaffirmed that participants must have an actual foreign-exchange exposure. The rules that were to kick in Friday will now take effect on May 3, the central bank said.
The announcement offers some respite as traders fear the move will force out proprietary traders and individual investors who comprise a large portion of the market. Local brokerages had started asking clients to close out contracts after the National Stock Exchange and BSE Ltd. on Monday reaffirmed the RBI’s Jan. 5 rule mandating the requirement.
That forced several players to square off their unhedged positions before the deadline, with total open interest in currency futures involving the rupee on the NSE halving to 3.5 million in the week through Thursday.
“The rules remain the same,” said Kishore Narne, director at Motilal Oswal Financial Services in Mumbai. “The deferment is for the orderly unwinding of positions.”
India’s foreign exchange rules permit the use of rupee forex derivatives only for the purpose of hedging, both for over-the-counter and exchange traded products, the central bank said.
The RBI in 2014 allowed a client to take position without having to provide documentary evidence of the underlying but didn’t do away with the need of having the exposure, the central bank said.
“It is emphasized that the regulatory framework for exchange-traded currency derivatives has remained consistent over the years and there is no change in the RBI’s policy approach,” the authority said.
Exchange-traded currency derivative volumes have grown exponentially since their launch in 2008. The average daily turnover stood at 412.9 billion rupees ($5 billion) in the year ended March 31, 2023, up from 102.9 billion rupees in 2017, according to the National Stock Exchange of India.
Read: Popular FX Derivatives Market Faces Crushing Blow in India (2)
–With assistance from Ronojoy Mazumdar.
(Updates with trader comment in fifth paragraph)
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