Banks petition RBI for guidance on new $2 million FX derivative limits

A letter from the Foreign Exchange Dealers’ Association to the Reserve Bank of India highlights banks' uncertainty over the implementation of a new rule that caps foreign-exchange derivative contracts at a $2 million notional value. The banks question how to aggregate exposures when a client uses multiple banks or spreads transactions over several days, and which institution must maintain the Foreign Exchange Risk Reserve.

They also seek guidance on hedging interest and coupon payments for external commercial borrowings, as well as the classification of principal and interest components of foreign-currency loans and bonds. The 20% levy on import forward dollar purchases, which could raise costs by roughly 12-13 paise per month, adds further complexity to levy calculations. Further concerns involve whether the FERR balance counts as high-quality liquid assets, forms part of the statutory cash reserve ratio or statutory liquidity ratio, and if it can be pledged for repo, the Marginal Standing Facility, or other RBI liquidity tools. Banks have requested a brief transition period, some asking for as little as seven days, to adjust systems, policies, and customer documentation.