New Delhi, Nov. 8 — The Securities and Exchange Board of India (Sebi) has introduced a new set of norms to curb the flow in rupee-related currency derivatives transactions. The move, which follows a recent Reserve Bank of India (RBI) circular, is expected to reduce pressure on the rupee at a time when geopolitical tensions and market instability have caused the currency to depreciate.
Mint explains the changes are and whether they will help the rupee.
Under Sebi’s revised rules, domestic investors and foreign portfolio investors (FPIs) can hold long or short rupee-denominated currency positions of up to $5 million across all stock exchanges combined, without needing to prove an underlying investment exposure.
The revised rules also prescribe specific conditions for FPIs: their short positions across all contracts in foreign currency-rupee pairs cannot exceed $5 million across exchanges. However, FPIs seeking to take long positions beyond this threshold must establish underlying exposure in Indian debt or equities, including units of equity and debt mutual funds.
The move follows RBI’s circular issued on 10 October, which slashed the threshold for taking positions without establishing an underlying exposure from $100 million to $5 million. This applies to positions taken through authorised dealers (banks) for hedging contracted exposures, as well as positions in currency derivatives across recognised stock exchanges.
Sebi amended its currency derivatives framework last week to align exchange-traded positions with the RBI’s revised limits.
The tightening comes against the backdrop of sustained pressure on the rupee over the past year. The currency has weakened by nearly 5% against the US dollar this year amid FPI outflows, elevated crude oil prices, and uncertainty over global trade.
Geopolitical tensions, particularly the conflict in West Asia, has added to the pressure by raising concerns over energy supplies and pushing up oil prices. As India imports a large portion of its crude oil, higher oil prices translate into greater demand for dollars.
In its circular, the central bank also opened a special window for Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp to meet their daily dollar requirements through designated banks.
Previously, RBI had capped banks’ net open positions in the domestic market at $100 million at the end of each day, which forced several lenders to unwind trades. Mint reported in April that the banking regulator was also expanding its scrutiny beyond banks to corporate treasury positions in the foreign exchange market to assess large arbitrage trades.
The rules may help reduce unhedged speculative positions in the rupee arising from currency derivatives trading. By reducing the threshold for positions without establishing underlying exposure from $100 million to $5 million, the RBI is making it harder for market participants to build large positions without showing genuine economic exposure.
The restriction on rebooking cancelled contracts is another important measure. Previously, market participants could cancel and rebook derivative contracts, potentially allowing repeated changes in positions. The new rule prevents users from rebooking a cancelled rupee-linked contract, although rolling over a contract on maturity remains permitted. This could also promote more orderly movements in the rupee.
The additional undertaking requirement aims to prevent the same underlying exposure from being hedged multiple times through different banks. This could improve transparency and reduce the possibility of excessive hedging. Together, these measures could help moderate speculative demand for dollars, improve discipline in the foreign exchange market, and reduce volatility in the rupee.
The revised rules will primarily affect traders and investors who take large positions in currency derivatives without having to demonstrate underlying exposure. By reducing the threshold for unhedged positions from $100 million to $5 million, RBI and Sebi have significantly narrowed the scope for taking large, speculative bets on the rupee.
For businesses and investors using derivatives to hedge genuine foreign-exchange risks, hedging will continue to be permitted, subject to the applicable exposure requirements and documentation.
However, the new rules require clients to confirm that the same underlying exposure has not been hedged through multiple banks, while cancelled rupee-linked derivative contracts cannot be rebooked.
Rollover of contracts on maturity will remain permitted. This means investors will have less flexibility to take large, unhedged currency positions, while those with genuine hedging requirements will need to maintain proper documentation and ensure compliance with the revised limits.
Published by HT Digital Content Services with permission from MINT. For any query with respect to this article or any other content requirement, please contact Editor at [email protected]
www.tradingview.com