The Reserve Bank of India (RBI) has directed authorised dealers to stop offering non-deliverable derivative contracts involving the Indian rupee to both resident and non-resident entities, which would include local companies. This latest directive adds to the regulatory uncertainty surrounding forward contract rules that banks are already grappling with. The restriction comes as banks continue to seek clarity from RBI on forward contract rules, with recent directives aimed at curbing speculation potentially impacting genuine trade hedging activities.
Corporates have been banned by RBI from cancelling and rebooking forward contracts, with the restriction stemming from directional bets on the rupee rather than risk management. As reported by The Economic Times, exporters who had sold dollars forward at ₹91 or ₹92 to protect earnings from exchange rate fluctuations were cancelling those hedges as the rupee breached ₹94. This practice was stopped since the transactions were directional bets on the rupee and not genuine risk management.
Corporates experiencing war-induced disruptions fear that the directive could restrict them from 'rolling over' forward contracts if payment against export is deferred, or imported goods take longer to land. According to The Economic Times, the fear stems from technical similarities between rollovers and regular cancellation and rebooking: a company closes the existing contract, pays the difference to the bank, and signs a new contract. When an exporter with a three-month forward cover suddenly faces a month or two delay in payment, it would want a new forward that matures at the end of the fifth month when the overseas client pays.
Banks are also awaiting clarification on hedging of external commercial borrowing (ECB). As reported by The Economic Times, against a five-year ECB, the forward contract to buy USD to service interest and repayment is 12-18 months. Corporates should be able to rollover after 12/18 months so that ECBs remain hedged, with RBI clarification needed since there's cancellation and rebooking against the same ECB.
Industry bodies are expected to formally raise these concerns with the RBI, with banks seeking flexibility in forward contract management. According to The Economic Times, banks may ask companies to give a declaration or certificate that a forward is backed by certain documents that would be produced if needed. Samir Lodha, MD of QuantArt, emphasized that genuine hedging requires flexibility, noting that if cash flows are delayed or maturity extends, companies should be allowed to roll over hedges without restriction as there is no speculative intent. The latest RBI directive on rupee NDDS adds another layer of complexity to these existing regulatory uncertainties.
