Reserve Bank of India restricts non-residents’ use of INR-linked NDDCs and requires a 20% FERR
Risk Management and Inter-Bank Dealings
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The Reserve Bank of India stipulates that authorised dealers may in future offer non-resident users non-deliverable derivative contracts (NDDCs) involving INR only for hedging purposes. For relevant contracts involving the purchase of foreign currency against INR to hedge exchange-rate risk on their own assets and liabilities, dealers must set aside a Foreign Exchange Risk Reserve (FERR) equal to 20% of the INR equivalent of the notional amount of each contract, and hold it in cash with the RBI in India on a daily basis until the contract is terminated. The rule applies to relevant foreign exchange derivative contracts entered into after its issuance.
The notification both tightens the purposes for which non-residents may use INR-linked NDDCs and sets a 20% cash reserve requirement for relevant proprietary hedging contracts, clearly defining dealers’ compliance costs.
Source:Reserve Bank of India — Notifications · rbi.org.in