The Reserve Bank of India (RBI) has allowed Clearing Corporation of India (CCIL) to provide guarantee to inter-bank currency forward transactions. The move will help banks use their capital optimally and bring more safety in the currency forward market.
At present, currency forwards are settled on CCIL. The central bank’s approval will enable CCIL to start providing guarantee for currency forward deals between banks within a month.
Currently, banks have to provide capital for exposure to the currency forward market as these deals are not guaranteed on a gross basis. This results in banks setting aside additional capital for every buy and sell transaction, adding to their trading cost.
After CCIL starts providing guarantee for deals struck on its platform between banks, it could save a lot for banks, which can utilise the capital optimally, said a CCIL executive. CCIL, RBI and FEDAI officials and bank representatives are scheduled to meet on November 4 to sort out the issues in the currency forward market.
A currency forward is a hedging instrument used by entities having foreign exchange exposure.
For example, if exporters see the rupee appreciating in the future, they sell their receivables on a future date in the forward market and secure the prevailing exchange rate for their future receivables by paying a forward premium, which is decided by demand and supply.
CCIL will provide guarantee for forward deals between banks, while those between between banks and corporate entities are not covered.
CCIL is also working on a margin mechanism for such deals. Banks will have to maintain margins in the form of government securities. CIL will guarantee the dollar-rupee forward deals, the lot size of which will be $1 million.