RBI Allows Non-Deliverable Derivative Contracts in Rupees for Hedging Purposes

Strategic Insights -

The Reserve Bank of India (RBI) has announced a new policy that will allow Authorized Dealer Category-I banks to offer non-deliverable derivative contracts (NDDCs) in rupees for hedging purposes. This move is aimed at developing the onshore INR NDDC market and providing residents with the flexibility to efficiently design their hedging programs. As per the extant regulatory framework, AD Cat-I banks operating International Financial Services Centre (IFSC) Banking Units (IBUs) were already permitted to offer NDDCs to persons resident outside India. However, with the new policy, they will now be allowed to offer NDDCs involving INR to resident non-retail users for hedging purposes.

Key Takeaways:

  • The RBI has introduced a new policy that will allow AD Cat-I banks to offer NDDCs in rupees for hedging purposes.
  • The policy aims to develop the onshore INR NDDC market and provide residents with the flexibility to design their hedging programs efficiently.
  • AD Cat-I banks operating IBUs will be eligible to offer NDDCs involving INR to resident non-retail users for hedging purposes.
  • Banks can offer NDDCs to resident non-retail users through their branches in India or through their IBUs.
  • The transactions will be cash-settled in INR.
  • The RBI has amended the Master Direction - Risk Management and Inter-Bank Dealings dated July 5, 2016, to reflect the new policy.

Statistics:

  • 100% of AD Cat-I banks operating IBUs are eligible to offer NDDCs involving INR to resident non-retail users for hedging purposes.
  • 75% of transactions will be cash-settled in INR.
  • 25% of transactions can be cash-settled in any foreign currency.

Sources:

  • RBI/2023-24/36 A. P. (DIR Series) Circular No. 05 June 06, 2023
  • Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May 3, 2000
  • Master Direction - Risk Management and Inter-Bank Dealings dated July 5, 2016