The Reserve Bank of India has allowed foreign portfolio investors (FPIs) and domestic players to hedge their currency risk without any underlying exposure up to $10 million.
The central bank has also set a limit of $10 million on banks’ proprietary positions in the exchange traded currency futures.
In July last year, at the peak of the rupee crisis, the RBI had barred all banks from taking any proprietary positions in the currency futures market. FPIs can take position — both long (bought) as well as short (sold) — in foreign currency up to $10 million or equivalent per exchange without having to establish existence of any underlying exposure. The limit will be both day-end as well as intra-day, it said in a notification.
“An FPI cannot take a short position beyond $10 million at any time and to take a long position beyond $10 million in any exchange, it will be required to have an underlying exposure,” the RBI said. RBI’s move will make Indian market more liberal for foreign investors, said an analyst.
FPIs will be able to hedge the currency risk arising out of the market value of their exposure to Indian debt and equity securities. “Such investors can participate in the currency futures/exchange traded options market through any registered or recognised trading member of the exchange concerned,” the RBI said.
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The RBI said the responsibility of ensuring the existence of the underlying exposure will rest with the foreign investor.
Similarly, the RBI said domestic participants will be allowed to take a long as well as short position up to $10 million per exchange without having to establish the existence of any underlying exposure. “For the purpose of convenience, exchanges may prescribe a fixed limit for the contracts in currencies other than US dollar such that the limit is within the equivalent of $10 million,” it said.
The RBI said domestic participants who want to take a position exceeding $ 10 million in the ETCD (exchange traded currency derivative market) market will have to establish the existence of an underlying exposure.