RBI’s Revised Framework for Foreign Exchange Dealings of Authorised Dealers

The Reserve Bank of India’s Financial Markets Regulation Department has issued a revised circular governing the foreign exchange dealings of Authorised Persons. This comprises of Authorised Dealer Category-I banks and Standalone Primary Dealers (SPDs) authorised as Authorised Dealer Category-III under Section 10(1) of the Foreign Exchange Management Act (FEMA), 1999. Issued under Sections 10(4), 11(1), and 11(2) of FEMA, 1999, and Section 45W of the Reserve Bank of India Act, 1934, this circular refines the legal framework governing inter-bank foreign exchange transactions. 

Expanded Permitted Transactions 

The revised framework broadens the scope of permissible foreign exchange transactions. Over-the-counter (OTC) transactions now explicitly encompass hedging, balance sheet management, market-making, and proprietary positions with other Authorised Dealers, overseas branches, IFSC Banking Units (IBUs), and Offshore Banking Units (OBUs). Authorised Dealers may additionally undertake Non-Deliverable Derivative Contracts (NDDCs) involving INR with overseas entities, provided the transacting bank or its non-resident parent maintains an operating IBU with transactions being cash-settleable in INR or any foreign currency. While the liberalisation of permitted transactions is welcome, it raises questions about the adequacy of existing supervisory infrastructure to monitor offshore dealings in real time. 

Electronic Trading Platforms and Offshore Markets 

A significant step forward is the explicit permission for Authorised Dealers to transact on Electronic Trading Platforms (ETPs) outside India, provided the ETP operator is incorporated in a Financial Action Task Force (FATF) member country and regulated by a Committee on Payments and Market Infrastructures (CPMI) or International Organization of Securities Commissions (IOSCO) member regulator. For INR-involving transactions on offshore ETPs, Authorised Dealers may only transact with non-residents, and the ETP operator must publicly disseminate transaction data. This move brings with it transparency obligation with clear regulatory intent. 

Governance, Risk Management and Borrowing Limits 

The circular imposes robust governance obligations requiring Board-approved policies for foreign exchange dealings, including a Net Overnight Open Position (NOOP) limit not exceeding 25% of total capital. Overseas foreign currency borrowings by Authorised Dealer Category-I banks are capped at 100% of Tier I capital or USD 10 million, whichever is higher, with prior RBI approval mandated for borrowings exceeding this threshold. Specific categories, including export credit financing and capital-raising borrowings, are expressly carved out from this limit. However, the delegation of NOOP limit-setting to Board-approved internal policies risks inconsistent application. 

Conclusion 

In summation, this circular judiciously liberalises India’s foreign exchange regulatory architecture under FEMA and the RBI Act, though its fragmented cross-referential structure warrants proactive engagement from regulated entities to close off loopholes.