RBI allows NDF contracts to clients, rebooking of related party trades

The (RBI) withdrew its April 1 circular which had barred banks and other authorised forex dealers from offering non deliverable forward (NDF) contracts to clients. It also rolled back the ban on banks and their clients from rebooking any foreign exchange derivative contract cancelled after April 1.

In a short notification on its website, the RBI said that the April 1 notification barring banks from offering or rebooking any involving rupee to resident or non-resident users, has been withdrawn. These measures were introduced by the RBI on April 1 to prevent banks to get into deals with their corporate customers to reduce their losses following the RBI direction limiting the net open rupee position of banks to $100 million on March 27.

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Forex watchers said the RBI clarification gives banks some breathing space. “This is a clarification from RBI gives banks some breathing space because it means they can offer NDF contracts to their clients within the overall $100 million open position limit. The RBI has also clarified that related party exposures can be rolled over or cancelled within the overall limits. These clarifications though will not have much impact on the dollar rupee but are important from providing banks some room to trade,” said Anindya Banerjee, head of commodity research at .

RBI also clarified that banks can cancel of rollover existing contracts with related parties. Transactions with non-related non-resident users on a back-to-back basis has also been allowed provided it is within the limits.

“With this reversal there is some semblance of normalcy in the market because banks were unfairly punished for executing genuine transactions. However, volumes both domestically and overseas continue to remain thin because banks are wary of taking positions due to the frequent changes in regulations by RBI which is not a healthy sign from a markets perspective,” said a senior bank treasury official.