RBI imposes 20% reserve requirement on banks' forex hedging contracts

The Reserve Bank of India has broadened the scope of its forex risk reserve requirements by bringing authorised dealers' own hedging contracts within the ambit of mandatory provisions. Under the new directive, banks must maintain a 20 per cent reserve against eligible rupee derivative contracts used to hedge their own currency exposures.

The measure eliminates any minimum transaction size threshold, meaning the reserve requirement applies uniformly across all qualifying hedging contracts. This ensures consistent compliance standards for authorised dealers regardless of the scale of individual transactions.

The central bank's move aims to enhance prudential management of forex risks within the banking system. By requiring reserves on banks' proprietary hedging activities, the RBI seeks to strengthen the capital buffers available to absorb potential currency-related losses.

Authorised dealers routinely engage in rupee derivative transactions to manage their own foreign exchange exposures arising from their operations. The new reserve requirement represents an extension of the RBI's existing forex risk management framework, which previously applied to other categories of derivative transactions in the forex market.

The directive takes effect in accordance with the timeline specified by the RBI, with banks required to ensure full compliance with the revised reserve requirements on their hedging portfolios.