RBI prohibits rebooking cancelled rupee-linked forex derivatives; cuts hedging threshold to $5 million
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims·
Forex regulation and risk mitigation: a key GS3 topic regarding exchange rate stability and speculative curbing.
Why in news
The RBI issued a circular prohibiting Authorised Dealers from allowing the rebooking of cancelled rupee-linked forex derivative contracts and lowered the hedging threshold.
Background
The RBI reduced the threshold for hedging without establishing underlying exposure from $100 million to $5 million equivalent. For transactions exceeding $2 million equivalent, dealers must obtain undertakings from users and maintain a 20% cash Foreign Exchange Risk Reserve.
Facts for Prelims
- FactNew hedging threshold without underlying exposure: $5 million equivalent
- FactPrevious hedging threshold without underlying exposure: $100 million
- FactCash Foreign Exchange Risk Reserve requirement: 20% for transactions exceeding $2 million equivalent
- BodyAuthorised Dealers: Entities permitted by RBI to deal in foreign exchange
Prelims practice question
With reference to RBI's new regulations on forex derivatives, consider the following statements:
- Authorised Dealers are permitted to rebook cancelled rupee-linked forex derivative contracts.
- The threshold for hedging without establishing underlying exposure has been reduced to $5 million equivalent.
- A 10% cash Foreign Exchange Risk Reserve is required for transactions exceeding $2 million equivalent.
Which of the statements given above is/are correct?
- (a)2 only
- (b)3 only
- (c)2 and 3 only
- (d)1, 2 and 3
Show answer
Answer: (a) 2 only — Statement 2 is correct. Statement 1 is incorrect: The RBI prohibited the rebooking of cancelled rupee-linked forex derivative contracts. Statement 3 is incorrect: The requirement is a 20% cash Foreign Exchange Risk Reserve.
For Mains
Q. Discuss the significance of RBI's regulatory measures on forex derivatives in maintaining exchange rate stability and curbing speculative activities in the Indian economy.
Dimensions to cover in your answer
- Speculative risk: Preventing artificial volatility by curbing rebooking of cancelled contracts
- Liquidity management: Ensuring capital adequacy through mandatory 20% cash risk reserves
- Regulatory oversight: Balancing market accessibility with systemic risk mitigation in forex markets
Keywords: Monetary Policy · Exchange Rate Stability · Forex Derivatives · Risk Mitigation · Regulatory Compliance
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