The Reserve Bank of India has introduced stricter rules for rupee based foreign exchange derivatives to limit speculative activity and support stability in the currency market. The new measures reduce the limit for foreign exchange derivative deals without an underlying exposure from 100 million dollars to 5 million dollars for authorised dealers and recognised stock exchanges.

Under the revised rules, authorised dealers cannot rebook rupee related foreign exchange derivative contracts that were cancelled after the directions were issued. However, contracts may still be rolled over when they reach maturity. The RBI has also instructed customers hedging confirmed foreign exchange exposures to ensure that the same exposure is not covered through another authorised dealer.

The central bank has additionally introduced a Foreign Exchange Risk Reserve, known as FERR. Authorised dealers must set aside cash equal to 20 per cent of the rupee value of eligible derivative contracts above 2 million dollars. This requirement applies to contracts used to hedge current account exposures involving the purchase of foreign currency against the rupee. The reserve must be maintained each day until the relevant contract ends.

The RBI has warned that dividing transactions or using multiple deals to avoid the new requirements will be treated as a violation. Authorised dealers are also required to submit daily FERR information through the Centralised Information Management System.

The directions under Circular No. 25 came into effect immediately, while the FERR rules under Circular No. 26 apply to contracts entered into after the directions were issued. The measures are intended to improve transparency, strengthen risk management and promote greater discipline in the foreign exchange market.