24-hour trades, hedging tools: RBI to rejig forex market rules

MUMBAI: Increased opportunities to hedge foreign exchange risk and longer trading hours are at the heart of a proposed overhaul by RBI to liberalise access to currency markets.

The draft framework broadens the different types of derivatives that banks (authorised dealers) may offer to individuals and firms, extending hedging tools for currency and interest-rate exposures. Trades could be executed across over-the-counter markets, domestic exchanges, platforms in international financial centres and approved offshore electronic venues, drawing Indian participants more firmly into global liquidity pools.

The reforms also relax timings keeping in mind the 24-hour nature of forex markets. Banks would be free to transact with clients and counterparties beyond domestic market hours, allowing exposures to be managed across time zones and prices to adjust more continuously. Greater latitude to deal with overseas branches, subsidiaries and offshore banking units will enable further integration of onshore and offshore markets. The rules permit non-deliverable derivatives linked to the rupee with offshore counterparties under safeguards, and allow banks involved in gold-related activities to hedge price risk abroad.

The central bank also proposes to put idle foreign-currency balances to work. With board approval, banks can place surplus funds overnight, lend them short term against foreign government securities, or invest in short-dated overseas government paper and money-market instruments. They may also extend loans in rupees or foreign currency at home or abroad.

Unused FCNR(B) deposits can be invested in longer-dated foreign sovereign bonds, provided maturities do not outlast the underlying deposits. Dealers said that the revised norms will help deepen foreign exchange markets and bring them in line with developed economies.