ETCD directives don't go well with RBI's stellar reputation

The recent decisions of the Reserve Bank of India (RBI) to not allow from April 5 transactions in exchange traded currency derivatives (ETCD) without underlying exposure to currency fluctuation risks and then allowing such trading till May 3, through a press note released after closing hours on April 4, have taken professionals familiar with foreign exchange markets by surprise.

- TNC RAJAGOPALAN

Trading in ETCD without establishing the existence of any underlying exposure has been going on since 2007, when RBI allowed currency futures to be traded on the exchanges approved by the Securities and Exchange Board of India (Sebi). The RBI'S AP (DIR) Circular no.147 dated June 20, 2014, Master Direction no.1/2016-17 dated July 5, 2016 and AP (DIR) Circular no.29 dated April 7, 2020 were so worded that the market participants, RBI and Sebi believed that underlying exposure was not required.

The limit for such trading was $10 million equivalent of notional value (outstanding at any point in time), subject to a single limit of $100 million equivalent across all currency pairs involving Indian rupee (INR), put together, and combined across all exchanges.

The trading volumes grew steadily and there was hardly any default.

Most participants knew the market intricacies.