Indias Central Bank liberalises swap transactions.

RBI today revised guidelines on foreign exchange derivative contracts, removing the cap of USD 100 million net limit by a

RBI today revised guidelines on foreign exchange derivative contracts, removing the cap of USD 100 million net limit by a bank on swap transactions. 

The move will help companies to increase net supply of foreign currency.

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“On a review, it has been decided to remove the above limit of USD 100 million placed for these swap transactions,” the Reserve Bank said in a notification.

As per the guidelines issued in 2010, swap transactions by banks acting as intermediaries were allowed by matching the requirements of corporate counter-parties.

While no limit was placed for undertaking swaps to facilitate customers to hedge their foreign exchange exposures, a “limit of USD 100 million was placed for net supply of foreign exchange in the market on account of swaps which facilitate customers to assume foreign currency liability”.

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That means each bank had to observe a net limit of USD 100 million when exposure of all such swaps are combined.

According to experts, the move is intended to allow banks to sell more currency swaps to companies with overseas debt at a time when the currency market is highly volatile.

RBI had in December 2010 issued final guidelines on Over The Counter Foreign Exchange Derivatives and Overseas Hedging of Commodity and Freight Prices. The norms came into effect from February this year.

RBI had allowed companies having net worth of Rs 100 crore to enter such contracts. However, companies were not allowed to write options on a stand-alone basis or enter into options such as leveraged structures and barrier options.

RBI has been continuing its witch hunt on the $4trillion a day global FX market, giving cautions to bank when sending funds cross borders.

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