The Reserve Bank of India (RBI) proposed a sweeping overhaul of foreign exchange regulations Tuesday. The draft directions aim to provide “Authorised Persons” with significantly more flexibility for hedging, market-making, and proprietary positioning.
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The move follows a comprehensive review of current regulations. The central bank seeks to simplify the reporting burden for banks and standalone primary dealers. These “Authorised Dealer (AD) Category-I” entities will now have broader powers to manage their balance sheets and borrow or lend in foreign currencies.
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Flexibility in Balance Sheet Management
The RBI’s draft directions on ‘Foreign Exchange Dealings of Authorised Persons’ allow dealers to undertake permitted transactions with other ADs for hedging exposures. Therefore, banks can more efficiently mitigate risks arising from their domestic and international portfolios.
Meanwhile, the proposal extends to proprietary positions. In fact, ADs can now engage in forex transactions to optimize their own books without the previous level of micro-management. This shift reflects the RBI’s growing confidence in the maturity of the Indian forex market.
Expansion of NDDCs and Electronic Platforms
A major highlight of the draft is the permission for ADs to undertake Non-Deliverable Derivative Contracts (NDDCs) involving the Rupee with other authorised dealers. This move bridges the gap between onshore and offshore markets. Therefore, it reduces the price discrepancies often seen in the NDF (Non-Deliverable Forward) markets in Singapore and Dubai.
Next, the RBI clarified rules for Electronic Trading Platforms (ETPs). ADs may undertake derivative contracts on RBI-authorised ETPs. Furthermore, they can access ETPs outside India. However, this is subject to the condition that the operator is incorporated in a Financial Action Task Force (FATF) member country.
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Gold Hedging and FATF Compliance
The draft also addresses the Gold Monetisation Scheme (GMS), 2015. Designated banks can now hedge their price risk using exchange-traded and OTC products in overseas markets. This is a critical step for banks allowed to enter into forward gold contracts in India.
Still, the RBI has placed a strict “zero-premium” condition on options. “The bank may ensure that there is no net receipt of premium, either direct or implied,” the draft stated Tuesday. This ensures that banks use these instruments strictly for risk management rather than speculative income.
Reality Check
The RBI markets these changes as “providing greater flexibility.” Still, the primary goal is to bring the offshore Rupee market back under domestic regulatory purview. Therefore, the “flexibility” comes with the expectation of increased oversight through digital reporting. In fact, while reporting is being “eased,” the frequency and depth of data required for NDDCs will likely increase the technical burden on smaller standalone dealers.
The Loopholes
The draft allows trading on overseas ETPs provided they are in FATF-compliant nations. In fact, many tax havens are technically FATF members, which could serve as a loophole for shifting proprietary risks offshore. Therefore, the “certain conditions” mentioned by the RBI will be the real battleground for compliance teams. Still, the March 10 deadline for public comments provides a narrow window for the industry to challenge these specific guardrails.
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What This Means for You
If you work in corporate treasury or banking, realize that the INR hedging landscape is about to become more integrated. First, review your current hedging policy to see if NDDCs can lower your transaction costs. Then, prepare your IT systems for the new reporting standards that will likely follow the March 10 feedback period.
Finally, expect the Rupee to exhibit more stable pricing between the 9:00 a.m. and 5:00 p.m. IST window. You should follow the “FATF-member country” list closely if your firm uses international trading platforms. Before the final notification, consult with your AD Category-I bank to understand how they plan to pass on these “flexibility” benefits to their clients.
What’s Next
The RBI will accept public comments on the draft directions until March 10, 2026. Then, a finalized set of regulations is expected to be notified by the first week of April, coinciding with the new financial year. Finally, the central bank will likely issue a separate FAQ for the Gold Monetisation Scheme hedging by mid-2026.
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