The Reserve Bank of India said its recent rules on derivatives apply only to FX
risk hedges tied to current-account flows and do not constrain market-making.
The clarification, issued after sharp volatility in the rupee forward market,
says banks must hold FX-risk reserves when hedging asset and liability exposures
using derivatives that involve buying foreign currency with rupees; transactions
that sell foreign currency are exempt. The requirement covers only hedges of
current-account transactions, typically import/export cash flows. HDFC
Securities FX analyst Dilip Parmar said the clarification should ease banks'
burden and could reduce longer-dated USD/INR forward premia, which reflect
hedging costs.
