What changed
RBI has issued revised Directions (Annex-I) that replace Part A (Section I) of the Master Direction – Risk Management and Inter-Bank Dealings dated July 5, 2016, and supersede several earlier notifications. The changes consolidate rules for all FX transactions (cash, tom, spot) and incorporate the Currency Futures and Exchange Traded Currency Options Directions into the Master Direction. Definitions for 'anticipated exposure' and 'contracted exposure' have been clarified, explicitly including foreign currency-denominated or linked transactions between residents settled in INR.
What it means for you
Banks and authorised persons must update their internal policies and systems to comply with the consolidated framework by April 5, 2024. The clearer definitions reduce ambiguity in classifying exposures, especially for resident-to-resident foreign currency-linked transactions. The inclusion of exchange-traded derivatives under the Master Direction streamlines regulatory oversight but requires banks to ensure their trading and hedging operations meet the new standards.
What you must do
- Review and update your bank's risk management policies to align with the revised Directions in Annex-I by April 5, 2024.
- Train staff handling FX derivatives on the new definitions of anticipated and contracted exposures, including resident-to-resident foreign currency-linked transactions.
- Ensure systems can differentiate between hedging and non-hedging derivative transactions as per the updated framework.
- Coordinate with Recognised Stock Exchanges and Clearing Corporations if your bank deals in exchange-traded currency derivatives.
Who it affects
Authorised Dealer Category-I banks, Recognised Stock Exchanges and Clearing Corporations, Residents in India hedging foreign exchange risk, Non-residents hedging foreign exchange risk
What is the effective date of the new Directions?
The revised Directions come into effect from April 5, 2024, replacing the existing Part A (Section I) of the Master Direction dated July 5, 2016.
Do the new rules affect resident-to-resident foreign currency transactions?
Yes. The definition of 'exposure' now explicitly includes transactions between residents that are denominated in or linked to a foreign currency but settled in INR, for hedging purposes.
Are exchange-traded currency derivatives covered under the new framework?
Yes. The Directions incorporate the Currency Futures and Exchange Traded Currency Options Directions into the Master Direction, consolidating all FX derivative rules.