What changed
Previously, forward contracts involving INR for current and capital account transactions could not be freely cancelled and rebooked; only exporters (50% limit) and importers (25% limit) had partial flexibility. Now, for all contracted exposures, forward contracts with residual maturity of one year or less can be freely cancelled and rebooked. For FIIs/QFIs/other portfolio investors, cancelled forward contracts can be rebooked up to 10% of the cancelled value, and contracts can be rolled over on or before maturity.
What it means for you
Banks can offer greater operational flexibility to corporate clients hedging current and capital account exposures, as the earlier restrictive limits on cancellation and rebooking are removed for short-tenor contracts. This simplifies hedging for importers and exporters and reduces compliance burden. For FIIs/QFIs, the 10% rebooking cap remains, but the ability to roll over contracts provides continuity. Banks must update their internal systems and advisory processes to reflect these liberalized rules.
What you must do
- Update internal risk management policies to allow free cancellation and rebooking of forward contracts with residual maturity up to one year for all current and capital account transactions.
- Communicate the revised guidelines to corporate clients, especially exporters and importers, highlighting the removal of earlier percentage limits.
- Ensure FII/QFI clients are informed about the 10% rebooking cap on cancelled contracts and the rollover facility.
- Train treasury and forex desk staff on the new rules to avoid misapplication of old limits.
Who it affects
AD Category-I banks, Exporters and importers with contracted exposures, FIIs, QFIs, and other portfolio investors, Corporate treasuries managing forex risk
Can all forward contracts now be freely cancelled and rebooked?
No, only forward contracts with residual maturity of one year or less for contracted exposures in current account and capital account transactions are eligible. Longer-tenor contracts remain subject to earlier restrictions.
What is the rebooking limit for FIIs/QFIs after cancellation?
FIIs/QFIs/other portfolio investors can rebook up to 10% of the value of forward contracts that have been cancelled. They can also roll over contracts on or before maturity without cancellation.
Does this circular affect existing forward contracts booked before January 13, 2014?
The circular applies prospectively from its date. Existing contracts continue under the rules in place at the time of booking, but banks should advise clients on the new flexibility for new contracts.