Forex transactions in India may soon become more flexible, as the Reserve Bank of India (RBI) has issued draft directions proposing wider operational freedom for authorised participants in the forex market.
The proposed changes are designed to simplify how banks and standalone primary dealers hedge risks, manage their balance sheets and carry out market-making activities. The draft framework also seeks to ease certain reporting requirements.
If adopted, revisions in the draft will recalibrate how liquidity and risk are handled in India’s currency markets.
Greater flexibility for authorised dealers
The draft — Foreign Exchange Dealings of Authorised Persons — proposes a broader set of forex transactions for authorised dealer category-I banks and certain standalone primary dealers.
The document proposes that authorised forex dealers should be allowed:
- to hedge currency exposures.
- manage balance sheets.
- market-making activities.
- proprietary positions.
The draft also permits borrowing and lending in foreign currency, expanding liquidity management options.
For financial institutions, this creates more room to manage currency risk dynamically rather than through narrowly defined instruments.
Derivatives and electronic platforms
The RBI draft has proposed allowing authorised dealers to undertake non-deliverable derivative contracts (NDDCs) involving the rupee with other authorised dealers.
Further, forex derivatives and foreign currency interest rate derivatives may be executed on electronic trading platforms (ETPs) authorised by RBI.
Transactions on overseas ETPs would also be permitted, provided the platform operator is incorporated in a country that is a member of the Financial Action Task Force (FATF).
This move aligns India’s forex framework more closely with global trading practices, while retaining regulatory safeguards.
Gold hedging in overseas markets
Banks designated under the Gold Monetisation Scheme 2015, and those permitted to enter forward gold contracts in India may hedge gold price risk using exchange-traded and over-the-counter instruments in overseas markets.
However, when using option-based products, the draft says banks need to ensure there is no net receipt of direct or implied premium.
For institutions active in bullion-linked operations, this provides clearer risk management pathways while maintaining prudential controls.
Reporting simplification
RBI has also proposed easing certain reporting obligations as part of regulatory reviews.
Although detailed operational guidelines will follow, the intent is to reduce procedural friction without diluting oversight.
Why this matters
The proposed changes do not expand speculative access to forex markets. They refine how regulated institutions manage currency exposure and liquidity.
For banks and financial intermediaries, the draft aims to:
- improve risk management efficiency.
- enhance market depth.
- reduce operational constraints.
- align domestic forex practices with global standards.
For businesses that are impacted by foreign currency movements, a more flexible and liquid forex ecosystem will translate into smoother hedging access over time.
The draft is an incremental and meaningful update for India’s currency management framework. The final framework will take shape after feedback from market participants. To that end, the central bank will allow comments on the draft till March 10.
What stands out, however, is the shift in approach; RBI is allowing greater operational flexibility, while still maintaining firm regulatory oversight.