To enhance the depth of the foreign exchange market, the Reserve Bank today allowed foreign portfolio investors to participate in the domestic exchange-traded currency derivatives.
At the same time, domestic players like exporters and importers would now require underlying exposure if they position beyond USD 10 million.
"It has now been decided to allow foreign portfolio investors (FPIs)...to access the currency futures or exchange traded currency options for the purpose of hedging the currency risk arising out of the market value of their exposure to Indian debt and equity securities," RBI said in a notification.
Such foreign investors can participate in the currency futures or exchange traded options market through any registered trading member of the exchange concerned, it said.
FPIs can take position in foreign currency up to USD 10 million or equivalent per exchange without having to establish existence of any underlying exposure, it said, adding position beyond USD 10 million in any exchange will be require an underlying exposure.
Requirement of an underlying exposure has been placed to check speculation in the currency market.
The onus of ensuring the existence of an underlying exposure would rest with the FPI concerned, it said.
In a separate notification, RBI said domestic participants would be be allowed to take position upto USD 10 million per exchange without having to establish the existence of any underlying exposure.
Domestic participants who want to take a position exceeding USD 10 million in the exchange-traded currency derivatives market will have to establish the existence of an underlying exposure, it said.
For the purpose of convenience, it said, exchanges may prescribe a fixed limit for the contracts in currencies other than USD such that the limit is within the equivalent of USD 10 million.
"In terms of the present regulatory framework, domestic participants in the currency futures and exchange traded options markets are not required to have any underlying exposure, while requirement of underlying is mandatory for taking a position in the over-the-counter derivatives markets," it added.
Capital market regulator Sebi has also issued a circular in this regard.
For participants who are exporters the eligible limit up to which they can take appropriate hedging positions in exchange-traded currency derivatives will be determined as higher of the average of the last three years’ export turnover, or previous year's export turnover.
In case of importers, 50 per cent of the higher of the average of their last three years' imports turnover or the previous year's turnover.
The participants would furnish, to the trading member of the exchange, a certificate from their statutory auditors regarding the limit mentioned above along with an undertaking signed by the Chief Financial Officer (CFO) to the effect that at all time, the sum total of the outstanding OTC derivative contracts, it said.
The central bank had in July last year imposed curbs such as doubling of margin requirement and a ceiling on position limits on exchange-traded currency derivatives.
The restrictions were imposed to check speculation in the foreign-exchange market. The rupee touched a record low of 68.85 on August 28.
The RBI had doubled the margins, or initial money deposited, while trading derivatives in this segment to check the rupee's slide.