Rising speculative bets stoke RBI crackdown on currency derivative

Excessive speculative bets in the domestic currency derivatives market is perceived as the primary catalyst behind the Reserve Bank of India’s (RBI’s) decision to clamp down on those engaging without any underlying exposure. According to sources familiar with recent central bank norms on exchange-traded currency derivatives (ETCDs), the Foreign Exchange Management Act (Fema), 1999, prohibits speculation against the Indian currency. “Will the Government of India permit speculation against the rupee? Is India prepared to endorse policy-driven speculation surrounding the rupee?” asked a source elucidating the central bank’s stance. Last week, the RBI deferred the implementation of norms on ETCDs linked to the Indian rupee until May 3, citing investor concerns that the move could drain liquidity. The norms were initially slated to take effect on April 1. Rupee-denominated currency derivatives contracts are actively traded on the National Stock Exchange (NSE), the BSE, and partially on the Metropolitan Stock Exchange of India. In principle, all trades necessitate an underlying exposure. However, traders are not mandated to furnish evidence of underlying exposure for positions up to $100 million; they must confirm the existence of such exposure.