What changed
Previously, forward contracts booked in excess of 50% of the eligible limit (based on past performance) had to be on a deliverable basis and could not be cancelled. This circular raises that threshold to 75%, meaning only contracts above 75% of the eligible limit are now subject to deliverable-only and non-cancellable conditions. The eligible limit itself remains unchanged—computed as the higher of the average of the previous three financial years' actual import/export turnover or the previous year's actual turnover.
What it means for you
Banks can now offer more flexible hedging to clients, as importers and exporters can book up to 75% of their eligible forward contract limit on a non-deliverable basis, reducing the need for physical settlement. This liberalization supports dynamic hedging and may increase demand for forward contracts, requiring banks to update their internal systems and client advisories. The change aligns with RBI's policy to ease forex risk management for trade participants.
What you must do
- Update internal guidelines to reflect the new 75% deliverable threshold for forward contracts booked on past performance basis.
- Communicate the revised limit to all constituents and customers, especially importers and exporters.
- Ensure systems are configured to flag contracts exceeding 75% of eligible limit as deliverable-only and non-cancellable.
- Maintain unchanged reporting requirements and other conditions as per existing circulars.
Who it affects
AD Category-I banks, Importers and exporters using forward contracts for hedging, Treasury and forex risk management teams at banks
What is the eligible limit for booking forward contracts based on past performance?
The eligible limit is the higher of the average of the previous three financial years' actual import/export turnover or the previous year's actual turnover, computed separately for imports and exports.
Can forward contracts booked up to 75% of the eligible limit be cancelled?
Yes, forward contracts booked up to 75% of the eligible limit can be cancelled, as they are not subject to the deliverable-only condition. Only contracts exceeding 75% must be on a deliverable basis and cannot be cancelled.
Does this circular change the reporting requirements for forward contracts?
No, all other conditions and reporting requirements prescribed for this facility remain unchanged as per earlier circulars.