In a move aimed at improving market efficiency and risk management, Reserve Bank of India has proposed greater operational flexibility for banks and primary dealers in foreign exchange dealings.
Under the “Draft circular of Foreign Exchange Dealings of Authorised Persons”, the RBI plans to allow banks’ authorised dealers (ADs) and standalone primary dealers (SPDs) to deal in a wider range of products and undertake foreign exchange transactions for hedging exposures, balance sheet management, and market-making activities.
As per the draft framework, AD Category-I banks will be permitted to borrow up to 100% of their Tier-I capital or USD 10 million, whichever is higher. Any borrowing beyond this limit will require prior approval from the RBI. Standalone Primary Dealers will be allowed to borrow from their parent entities or overseas banks within the prescribed limits.
To manage proprietary and client-related exposures, ADs will be allowed to undertake foreign exchange transactions, including Non-Deliverable Derivative Contracts involving Indian Rupees. These transactions may be cash-settled in INR or foreign currency, provided the bank or its parent operates an IFSC Banking Unit.
The draft also permits ADs to carry out transactions on RBI-authorised electronic trading platforms. In addition, offshore electronic trading platforms may be used if the platform operator is located in a Financial Action Task Force member country and is regulated by CPMI or IOSCO.
ADs will also be allowed to deal in currency derivatives on recognised Indian exchanges, IFSC exchanges, and FATF-regulated overseas exchanges for non-INR contracts.
On fund utilisation, ADs may deploy surplus balances in foreign currency accounts for overnight placements, reverse repo transactions with maturities of up to 1 year, investments in overseas money market instruments, or overseas debt instruments issued by a foreign state with original or residual maturity of up to 1 year.
The draft further allows ADs to lend in INR and foreign currency. Un-deployed FCNR (B) funds may be invested in long-term overseas debt instruments issued by a foreign state, subject to the condition that the residual maturity does not exceed the maturity of the underlying FCNR (B) deposits.
Banks designated under the Gold Monetisation Scheme will also be allowed to hedge gold price risk in overseas markets using OTC or exchange-traded products, subject to a “no net premium paid” rule on options.
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