What changed
Previously, only AD Cat-I banks operating IFSC Banking Units (IBUs) could transact in rupee NDDCs. Now, Standalone Primary Dealers authorized as AD Cat-III are also eligible to offer these contracts to both residents and non-residents. The Master Direction has been updated to include SPDs in relevant paragraphs.
What it means for you
Banks and lenders can now see increased liquidity and competition in the rupee NDDC market as SPDs enter. This may lead to tighter pricing and more hedging options for clients. SPDs themselves gain a new revenue stream and can better manage their own forex risk.
What you must do
- Update internal risk management policies to include SPDs as counterparties in NDDCs.
- Review and amend any existing agreements with SPDs to reflect their new eligibility.
- Train dealing room staff on the expanded participant list for rupee NDDCs.
- Monitor market developments for potential pricing changes due to SPD participation.
Who it affects
Standalone Primary Dealers (AD Cat-III), AD Cat-I banks with IFSC Banking Units, Resident and non-resident clients seeking rupee NDDCs, Risk management and treasury departments of authorized persons
What exactly are non-deliverable derivative contracts (NDDCs) involving the Rupee?
These are derivative contracts where the settlement is in a foreign currency (typically USD) rather than in rupees, used for hedging or speculation when onshore rupee delivery is restricted or not preferred.
Do SPDs need any additional approval to start transacting in these NDDCs?
No, the circular states these instructions are effective immediately. SPDs already authorized as AD Cat-III under FEMA can begin transacting without further RBI approval, provided they comply with the updated Master Direction.
Does this circular affect existing NDDC transactions by AD Cat-I banks?
No, existing permissions for AD Cat-I banks operating IBUs remain unchanged. The circular only adds SPDs as eligible participants, expanding the market.