𝐂𝐥𝐚𝐫𝐢𝐭𝐲 𝐢𝐧 𝐂𝐮𝐫𝐫𝐞𝐧𝐜𝐲: 𝐍𝐞𝐞𝐝 𝐟𝐨𝐫 𝐠𝐫𝐞𝐚𝐭𝐞𝐫 𝐩𝐮𝐛𝐥𝐢𝐜 𝐜𝐨𝐧𝐬𝐮𝐥𝐭𝐚𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐜𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐭𝐢𝐨𝐧 𝐛𝐲 𝐑𝐞𝐠𝐮𝐥𝐚𝐭𝐨𝐫𝐬 

In the fast-paced world of currency trading, clarity and communication are paramount. However, recent events in the Exchange-Traded Currency Derivative (ETCD) market have potentially left retail traders reeling from confusion. The genesis of this goes back to the beginning of 2024 when the Reserve Bank of India (RBI) issued revised Master Directions on ‘Risk Management and Inter-Bank Dealings – Hedging of foreign exchange risk’ which were to come into effect on April 05, 2024.
 
Initially, the new directives appeared to align closely with their predecessors, seemingly serving a clarificatory purpose. However, concerns have arisen among market participants in recent times. This may stem from subtle alterations introduced by the RBI. For instance, while the requirement concerning the establishment of underlying exposure, capped at a single limit of USD 100 million, remained consistent with the previous version of the Master Directions, the new guidelines included a clarificatory note. This note emphasizes that Recognized Stock Exchanges must inform users that although they are not obligated to establish the existence of underlying exposure, they must ensure the presence of a valid underlying contracted exposure, un-hedged by any other derivative contract, and be prepared to substantiate it if necessary.
 
Furthermore, the RBI has revised the definition of ‘contracted exposure’ to specify that it excludes exposures arising from derivative transactions undertaken for purposes other than hedging. Essentially, only transactions between residents denominated in a foreign currency or linked to a foreign currency or benchmark, but settled in INR, would be recognized as a contracted exposure, implying that speculative transactions would not be permissible.
 
However, the RBI recently has issued a press release clarifying that that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI’s policy approach. Further, it also extended the operative date of the new master directions from April 05, 2024 to May 03, 2024.
 
The above issue has again emphasized the need for a more holistic consultative process required to be undertaken by the Regulators before issuing regulatory measures. However, it has also emphasized a need for clear and early communication between the three parties involved viz. the Regulator, Market Participants and Investors.
 
A copy of the RBI Press Release is enclosed herewith.