Source: BS
Why in News?
The Reserve Bank of India (RBI) has issued draft directions proposing to liberalise foreign exchange (forex) transaction norms, including allowing authorised dealers to trade on offshore electronic trading platforms, subject to safeguards.
Objective
- Deepen India’s forex and derivative markets.
- Align regulations with global electronic trading practices.
- Improve market efficiency and liquidity.
- Strengthen regulatory oversight and risk management.
Key Proposals
1. Trading on Offshore Electronic Trading Platforms (ETPs)
- Authorised dealers (commercial banks and primary dealers) can transact on ETPs located outside India.
- Conditions:
- Platform must be in Financial Action Task Force (FATF) member jurisdiction.
- Must be regulated by authorities linked to:
- Committee on Payments and Market Infrastructures (CPMI)
- International Organization of Securities Commissions (IOSCO)
2. Rules for Rupee Transactions
- For rupee trades, authorised dealers can transact only with non-residents.
- Offshore ETP operators must publicly disclose transaction data.
3. Non-Deliverable Derivative Contracts (NDDCs)
- AD Category-I banks may undertake rupee NDDCs with:
- Other authorised dealers
- Overseas entities
- IFSC Banking Units (IBUs)
- Offshore Banking Units (OBUs)
- Settlement:
- Cash-settled in rupees or foreign currency.
- Condition:
- Bank or its non-resident parent must have an operating IBU.
4. Governance Requirements for Authorised Dealers
- Mandatory board-approved forex policy.
- Net Overnight Open Position (NOOP) limit:
- Maximum 25% of total capital (Tier I + Tier II).
- RBI may prescribe separate rupee-specific limits depending on market conditions.
5. Overseas Borrowing Limits
- AD Category-I banks can borrow foreign currency up to:
- 100% of Tier I capital or
- $10 million, whichever is higher
- Exemptions include:
- Export credit borrowings
- Capital-raising funds
- Certain head office funds
- Short-term nostro overdrafts
6. Deployment of Surplus Foreign Currency Funds
Authorised dealers may invest in:
- Overnight placements
- Reverse repos (up to one year)
- Overseas sovereign or money market instruments (up to one year maturity)
- Lending in rupees or foreign currency under FEMA regulations
FCNR(B) funds may be invested in long-term overseas sovereign debt (subject to conditions).
Who Are “Authorised Persons”?
- AD Category-I banks
- Standalone Primary Dealers (AD Category-III)
Authorised under Section 10(1) of FEMA, 1999.
What is Net Open Position (NOP)?
- Measures exposure of a bank or entity to foreign currency risk.
- Difference between foreign currency assets and liabilities.
- Used by regulators to monitor risk in forex markets.
Legal Framework
- Governed under the Foreign Exchange Management Act (FEMA), 1999.
- RBI regulates foreign exchange transactions in India.
