India’s securities regulator has set a $5 million threshold for rupee-derivative positions without underlying exposure, tightening exchange rules while leaving the change’s effect on spot trading unmeasured.
On Nov. 5, the Securities and Exchange Board of India (SEBI) set the allowance for domestic clients and foreign portfolio investors (FPIs) with long or short rupee-linked positions that lack underlying exposure. The calculation combines the value outstanding across recognized exchanges and rupee pairs at a given time.
The $5 million figure is not a ceiling on every possible position. Domestic clients may take larger positions if they meet Reserve Bank of India (RBI) conditions. FPI rules differ by direction: short positions across foreign-currency/rupee contracts cannot exceed $5 million, while larger long positions require underlying exposure through Indian debt or equity securities, including mutual fund units.
SEBI’s circular matches the exchange-traded part of the RBI’s Oct. 10 package. That day, the RBI lowered two distinct limits from $100 million to $5 million equivalent: one for contracted-exposure hedges arranged through authorized dealers without underlying exposure, combined across dealers, and another for exchange-traded INR positions without underlying exposure, combined across recognized exchanges. The RBI said its measures were intended to strengthen market discipline and improve foreign-exchange risk management.
A separate RBI circular requires authorized dealers to keep a Foreign Exchange Risk Reserve for each INR-linked derivative contract above $2 million equivalent when it hedges a current-account transaction in which a customer buys foreign currency. The reserve must be maintained daily through the contract’s end and equals 20% of the contract’s notional amount converted to its INR equivalent.
Before SEBI issued its circular, Reuters reported that some banks cut back dollar/rupee forward quotes, bid-ask spreads widened and client trading shifted toward non-deliverable forwards. Reuters also linked the rupee’s Oct. 13 gain to the broader RBI package and likely spot-market intervention, without isolating the contribution of the derivatives rules. The outlet cited high crude prices and capital outflows as pressures on the rupee. Mitul Kotecha, Barclays’ head of FX and emerging-markets macro strategy for Asia, told Reuters the measures “cannot eliminate genuine demand” tied to trade, hedging and capital outflows.
