The Reserve Bank of India (RBI) recently introduced significant regulatory changes to develop the onshore non-deliverable derivative market (NDDC). These changes were announced in the first Bi-monthly Monetary Policy Statement for 2023-24, dated April 6, 2023. The focus is on enhancing the flexibility for residents to design their hedging programs efficiently.
Attention is drawn to the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000, as amended, and the Master Direction – Risk Management and Inter-Bank Dealings dated July 5, 2016, also as amended.
Under the current regulatory framework, Authorised Dealers Category – I (AD Cat-I) banks operating International Financial Services Centre (IFSC) Banking Units (IBUs) are permitted to offer non-deliverable derivative contracts (NDDCs) to persons resident outside India. These derivatives are cash-settled in foreign currency.
The recent amendments aim to further develop the onshore INR NDDC market. This includes allowing AD Cat-I banks operating IBUs to offer NDDCs involving INR to resident non-retail users for hedging purposes. These transactions will be cash-settled in INR. Additionally, there is now flexibility in cash settlement of NDDC transactions between two AD Cat-I banks and between an AD Cat-I bank and a person resident outside India. Such transactions can be settled in INR or any foreign currency.
The amendments to the Master Direction – Risk Management and Inter-Bank Dealings, dated July 5, 2016, are as follows:
- The existing definition of Non-deliverable derivative contract (NDDC) has been revised. An NDDC now means an OTC foreign exchange derivative contract with no delivery of the notional amount of the underlying currencies and which is cash settled.
- Authorised Dealers must offer derivative contracts to users based on their classification. While offering a derivative contract involving INR, other than NDDCs offered to persons resident outside India, Authorised Dealers must ensure compliance throughout the contract’s life.
- Banks in India with an Authorised Dealer Category-I license and operating IFSC Banking Units (IBUs) are eligible to offer NDDCs involving the Rupee or otherwise to persons resident outside India. These transactions can be conducted through their IBUs, branches in India, or foreign branches and can be cash-settled in INR or any foreign currency.
- A new provision allows banks in India with AD Category-I licenses and IBUs to offer NDDCs involving INR to resident non-retail users from their branches in India. These transactions must be cash-settled in INR.
- Authorised Dealers with an IFSC Banking Unit (IBU) can transact in NDDCs with other AD Category-I banks having IBUs and banks overseas. These transactions can be conducted through their IBUs, branches in India, or foreign branches and can be cash-settled in INR or any foreign currency.
These regulatory changes are issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999, without prejudice to permissions or approvals required under any other law. The amendments aim to foster a more flexible and efficient hedging environment for residents, contributing to the development of the onshore INR NDDC market.
Access the full RBI circular here
