Banks Urge RBI to Ease 20% Forex Deposit Rule, Seek Clarity on Rupee-Defence Measures

New Delhi, Oct 12 (KNN) Banks have urged the Reserve Bank of India (RBI) to ease its recently announced requirement for a 20 per cent cash deposit on certain foreign exchange (FX) derivatives and remove the transaction threshold above which the rule applies, according to four people familiar with the discussions.

Lenders have approached the central bank through the Foreign Exchange Dealers' Association of India (FEDAI), seeking the removal of the requirement for banks to maintain a 20 per cent cash deposit with the RBI against FX derivatives used to hedge current-account exposures, the people said, Reuters reported.

The RBI announced the measures on Saturday to curb corporate demand for forward dollars, which has added pressure on the rupee amid elevated oil prices and capital outflows. The measures also included redirecting oil companies' dollar demand away from the spot market.

The rupee gained around 1 per cent on Monday following the regulatory announcements.

Banks have proposed replacing the 20 per cent deposit requirement with a flat charge on companies purchasing forward dollars or using other derivatives to hedge current-account exposures. They argue that this would increase hedging costs without locking up rupee liquidity in banks' treasury operations.

Citi economists have estimated that the deposit requirement could absorb around Rs 60,000 crore to Rs 70,000 crore (USD 6.27 billion to USD 7.31 billion) of liquidity, even if importer hedging activity declines substantially.

A banker who attended a FEDAI meeting on Sunday said banks would pass on the additional cost to clients. The banker argued that imposing a higher direct charge instead of the reserve requirement would reduce operational friction, according to Reuters.

Banks Seek Clarity On Transaction Threshold

Lenders have also sought the removal of the USD 2 million threshold above which the deposit requirement applies, warning that companies could split their hedging transactions into smaller lots to remain below the limit.

Bankers said monitoring such practices could be difficult, as lenders may not be in a position to question clients booking multiple smaller transactions.

They have also sought clarity on whether the 20 per cent deposit requirement applies to hedges against interest payments on foreign-currency loans.

While the rules do not cover hedging against principal repayments on overseas loans, banks want confirmation on whether interest payment-related hedges are also exempt.

The RBI did not immediately respond to an email seeking comment.

(KNN Bureau)