RBI tightens rupee derivative rules, opens dollar window for oil companies
The Reserve Bank of India on October 10, 2026 tightened the rules for rupee foreign exchange derivatives. It cut the limit for hedging without proof of underlying exposure from USD 100 million to USD 5 million and barred rebooking of cancelled contracts. From October 12, it will sell dollars to three public sector oil marketing companies through designated banks.
Syllabus: GS3 · Indian Economy & Growth; Prelims · Economy & Social Development; GS2 · Statutory & Regulatory Bodies
Why it matters
An importer who must pay a dollar bill later can hedge by booking a forward contract to buy dollars at a fixed rate. Such a company must now show the bill behind its contracts once its positions cross USD 5 million, and cannot cancel and rebook a contract. A company with real payments to protect keeps its cover; positions with nothing behind them become harder to take. A bank writing a hedge over USD 2 million for a current account payment must keep 20% of its value in cash with the RBI, likely raising costs. The three oil companies will get their daily dollars from the RBI through designated banks. The larger question is how far a central bank should restrict a market to keep the currency orderly.
Prelims pointers
- Foreign Exchange Management Act, 1999: replaced the Foreign Exchange Regulation Act, 1973; in force from June 1, 2000; aims to facilitate external trade and maintain an orderly foreign exchange market.
- Authorised person (Section 10 of FEMA): an Authorised Dealer, money changer or offshore banking unit authorised by the RBI to deal in foreign exchange.
- Section 11 of FEMA: the RBI may give directions to authorised persons on payments and on any act relating to foreign exchange.
- Section 45W of the Reserve Bank of India Act, 1934: the RBI may give directions to agencies dealing in securities, money market instruments, foreign exchange and derivatives.
- Capital account transaction (FEMA): one that alters the assets or liabilities outside India of a resident, or in India of a non-resident. Any other is a current account transaction.
- Convertibility: the rupee is fully convertible on the current account since August 1994 and partly convertible on the capital account.
- Exchange-traded currency derivatives: standardised futures and options on recognised stock exchanges. Forward contracts are over-the-counter deals between a bank and its customer.
- Oil marketing companies: Indian Oil, Bharat Petroleum and Hindustan Petroleum are public sector undertakings under the Ministry of Petroleum and Natural Gas.
Practise a UPSC-style question
With reference to the Foreign Exchange Management Act, 1999, consider the following statements:
1. It was enacted to replace the Foreign Exchange Regulation Act, 1973, which it repealed.
2. Under it, the Securities and Exchange Board of India authorises banks to deal in foreign exchange as Authorised Dealers.
3. Under it, the Reserve Bank of India can give directions to authorised persons on their dealings in foreign exchange.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Show the answer
Answer: (c) 1 and 3 only
1 is correct: the Foreign Exchange Management Act, 1999 replaced and repealed the Foreign Exchange Regulation Act, 1973. 2 is incorrect: Authorised Dealers are authorised by the Reserve Bank of India under Section 10 of the Act, not by the Securities and Exchange Board of India. 3 is correct: Section 11 lets the Reserve Bank of India give directions to authorised persons, and its October 2026 circulars on rupee derivatives cite Sections 10(4) and 11(1).
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