The Reserve Bank of India's (RBI) recent directive mandating underlying foreign exchange exposure for exchange-traded rupee derivative transactions has stirred confusion among brokers, raising concerns about its potential impact on the growing segment.

In a circular dated January 5, the RBI outlined guidelines permitting stock exchanges to offer forex derivative contracts involving the rupee for hedging contracted exposure purposes. The move marks a major shift since 2008 when the RBI initially allowed transactions in dollar/rupee currency futures primarily for hedging foreign exchange rate risks.

Scheduled to take effect on April 5, the new rule has prompted queries and apprehensions from market participants seeking clarity on the exposure requirement. Abhilash Koikkara, head of forex and rates at Nuvama Professional Clients Group, said that further clarification is required, highlighting that brokers have reached out to exchanges awaiting guidance.

The RBI's circular distinguishes between exposure requirements for rupee and non-rupee derivatives. While derivative contracts not involving the rupee can be offered without restriction, the scenario differs for rupee derivatives.

Under the revised guidelines, stock exchanges must inform clients that although proof of underlying exposure is not mandatory for positions up to $100 million, clients must ensure such exposures exist and have not been previously hedged.

Interpretations of the rule vary among market participants, with some brokers interpreting it as necessitating underlying exposure regardless of position size. This interpretation raises concerns, particularly among clients who predominantly engage in speculation and arbitrage, as actual forex exposure is limited.

While brokers are not held accountable for ensuring client exposure to FX, they are obligated to inform clients about the necessity of exposures for transacting in derivatives.

Despite inquiries, the RBI has yet to provide clarity regarding the underlying exposure requirements for rupee derivatives offered by exchanges.

Exchange-traded futures and options play a pivotal role in India's foreign exchange markets, catering to speculators, exporters, importers, and even RBI interventions. The open interest on dollar/rupee futures on the National Stock Exchange exceeds $5 billion, with average daily volumes reaching $2.8 billion last year.

(With Reuters inputs)