The RBI said the latest limits are aimed at hedging activity, not market-making. It further noted the curb applies solely to hedges of current-account transactions, typically import and export payments.
Banks must maintain a foreign-exchange risk reserve with the RBI when they buy foreign currency against the rupee to hedge their own assets and liabilities through derivatives. If the relevant transaction involves selling foreign currency, banks do not need to set aside cash. Separately, the risk reserve itself is a new tool that requires a rupee holding equal to 20% of the notional value for each derivative deal above $2 million.
Hedges for interest on external borrowings or for dividends paid to overseas investors are carved out and don't attract the reserve. Over the past few days, the monetary authority rolled out wider market curbs to tamp down speculation as the rupee neared record lows.
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The RBI issued Thursday's statement after banks told the central bank the initial curbs were draining liquidity in rupee forwards and sought clarity on their scope. This week, onshore dollar-rupee forward yields surged to levels not seen in more than five years, a metric importers track when fixing future dollar purchases. "The RBI's clarification provides some relief for banks and may result in a decline in the longer-term dollar-rupee forward premium rates," said Dilip Parmar, currency analyst at HDFC Securities, referring to hedging costs.
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