Main Note: [Foreign Exchange Management](Foreign%20Exchange%20Management.md) 1. Three interrelated factors have contributed to the evolution of foreign exchange market as we see it now. [^2] 1. First, there has been tremendous improvement in global communication infrastructure gone are the days when trading and settlement used to be done over telegraphic systems (hence the term cable rate). The modern communication network has reached the time and space gap and the only limitation now is the diurnal motion of the earth. 2. Second, this period also coincided with quantum advancement in computing capacity. This has helped in improving the communication network. But more importantly it has made trading and settlement quite easier. It is possible for the trader as well as the back office to instantaneously understand the implication of a trade. The ultimate culmination of this is of course ‘algorithm trading’. 3. Third, along with the development in computation, sophisticated mathematical models have evolved to engineer complex and bespoke financial products. A combination of these three factors has brought about a foreign exchange market that is truly global, liquid and large. # Forex Products - By Platform The foreign exchange market can be classified either by the trading platform-OTC and ETCD or the type of contract-spot and derivatives. ## 1. OTC 1. Most of forex trade in India is OTC (not traded on a centralised exchange). 2. Trading happens on FX-Clear by Clearing Corporation of India (CCIL) - It has both order matching and negotiation mode. 1. Reuters Eikon (Reuters D2) terminals are also used for cross-currency quotes or for offshore rates. 3. Spot, forex swaps(near and far leg swaps in USD/INR), outright forwards, currency swaps (not traded on FX-CLEAR), currency options form the OTC market - They are either traded on CCIL's platform or negotiated bilaterally (inter-bank trades) and have to be [reported](https://www.ccilindia.com/mm-tr-derivatives) to CCIL’s Trade Repository ([CCIL-TR](https://www.ccilindia.com/rules2)). 1. Other than spot, all of the above instruments are called derivatives. 4. CCIL is the central counterparty (CCP) for settlement all USD/INR interbank forex trades. 5. Reporting 1. [July 2012](RBI_Speech_20120709_Launch%20of%20the%20OTC%20Derivatives%20Trade%20Repository.pdf) - the platform for OTC forex derivatives *(only OTC inter-bank USD-INR forwards, FX swaps and FCY-INR options)* was launched 6. [Settlement](https://www.ccilindia.com/faqmoduleforex-settlement) is done on payment versus payment (PvP) and multilateral netting (netting by novation). So a bank’s USD payment will be debited only if the matching INR payment is also confirmed. It eliminates Herstatt risk. 1. Settlement window (4:00 pm to 8:30 pm) - All actual money movement happens during this time. The INR leg is settled (directly debited or credited with help of PoA) through the member's current account at RBI. Those that have sold dollars have to transfer it to CCIL’s USD account at the settlement/designated. The cut-off time for the transfers is 8:30 pm. 7. [FX-CLEAR](https://www.clearcorp.co.in/web/clearcorp/fx-clear-faq) dealing system- It was launched in [2003](https://www.clearcorp.co.in/web/clearcorp/fx-clear2) 1. the Order matching mode of _FX_-_CLEAR_ allows _trading_ in Spot, Swap and Outright Forward instruments in the USD/INR currency _pair_. it also has negotiation mode. 8. Inter-bank timing - Trades happen between 9 am to 5 pm, and the settlement [window](https://www.ccilindia.com/documents/d/ccil/01032023-pdf) is from _4:00 p.m. to 8:30 p.m_. 9. [Notifications](https://www.ccilindia.com/notifications1) page on CCIL's website. 10. All MTM settlement are based on [cash rates](https://www.ccilindia.com/documents/d/ccil/01032023-pdf) 11. [Timeline of events](https://www.ccilindia.com/factbook): 1. November 8, 2002 - CCIL started providing guaranteed settlement facility for all US Dollar/Indian Rupee, inter-bank Cash, Tom, Spot and forwards. 2. August 7, 2003 - FX-CLEAR, a forex dealing system, which was launched by Clearcorp on August 7, 2003 3. December 1, 2009 - It started CCP clearing of Forward transactions. 12. Research & Data - [CCIL Derivatives Market Quarterly](https://www.ccilindia.com/daily-market-analysis), [CCIL Forex Market Quarterly](https://www.ccilindia.com/india-forex-market-quarterly) 13. USD is a three-digit numeric code assigned by ISO 4217 to the official currency of the United States of America, that is the United States Dollar. ### 1.1 Physically-settled #### 1. Spot 1. In spot transaction, currencies are traded at the prevailing rates and the settlement/value date is two business days from the day of spot trade (T+2). 2. For same-day (Cash) or next-day delivery, banks use "up-to spot" swaps, which are: 1. Cash/Tom, where Cash is Same Day (T+0), and Tom is Next Day (T+1) 2. Tom/Spot, where Spot - Two Days Later (T+2), and 3. Cash/Spot 3. Spot instruments are: 1. C-SPOT (odd amount) 2. R-SPOT (at FBIL reference rate +/- premium/discount) 4. Timings - The spot market is open 9 AM to 5 PM. 1. The global forex market is a continuous 24-hour interbank market where trading begins every Monday morning in Wellington, New Zealand, and then moves with the sun through Sydney, Tokyo, Hong Kong, Singapore, the Middle East, Europe, London, and finally New York, before the cycle returns to New Zealand. 2. So the forex market effectively operates around the clock from Monday to Friday. 5. Participants - They are banks (or their [[FX-Retail Platform|customers]]) holding Authorised Dealer (AD) licenses. 6. [Retail access to spot market](FX-Retail%20Platform.md) 1. [Oct 12, 2017](RBI_Discussion%20Paper_20171012_Discussion%20paper%20on%20foreign%20exchange%20trading%20platform%20for%20retail%20participants.pdf) - RBI issued discussion paper on foreign exchange trading platform for retail participants 2. During 2019-20, ==[[RBI_Annual Report_2020.pdf#page=136&selection=167,0,167,67|major initiatives]]== were undertaken for improving access and pricing outcomes, especially for retail users in the foreign exchange market. 3. August 5, 2019 - Clearing Corporation of India Ltd. (CCIL) has started providing a centralized electronic forex trading platform – [[FX-Retail Platform|FX-Retail]] – for individual and small and medium enterprise customers effective from August 5, 2019. 7. Trading Platform - Transactions in this spot segment mostly happens on two software systems - FXT-D2 or Reuters D2 by Thomson Reuters and FX-CLEAR by Clearing Corporation of India (CCIL).  1. It has [order matching](https://www.clearcorp.co.in/en/web/clearcorp/order-matching-mode) and chat mode 2. Why is there a need for more number of FX Trading Platforms? [^7] 3. As of Nov-2025, FX-CLEAR [only](https://www.ptinews.com/story/business/malhotra-asks-ccil-to-create-infra-for-currency-trades-beyond-usd-inr/2931407) allows USDINR pair. 4. Settlement - They are settled by Clearing Corporation CIL (for Cash, Tom, Spot and Forward USD-INR transactions) through a process of multilateral netting. 8. [July 4, 2018](RBI_Press%20Release_20180704_Computation%20and%20Dissemination%20of%20Reference%20Rate%20-Taking%20Over%20by%20Financial%20Benchmarks%20India%20Private%20Limited%20(FBIL).pdf) - RBI [announced](WSS%20-%20Ratio%20and%20Rates.md#FBIL%20-%20Reference%20Rate%20&%20Forward%20Premia) that the computation and dissemination of [reference rate](https://www.fbil.org.in/#/benchmark/reference) of Rupee against the USD, Euro, Japanese yen and Pound Sterling and the interbank USD/INR forward premia, will be taken over by FBIL from July 10, 2018 1. Reference data also available on [RBI's website](https://www.rbi.org.in/scripts/referenceratearchive.aspx) 9. [April 09, 2026](RBI_Notification_20260409_Guidelines%20to%20facilitate%20faster%20cross-border%20inward%20payments.pdf) - RBI issued guidelines to facilitate faster cross-border inward payments #### 2. Forwards 1. It is a derivative. It requires underlying exposure and are deliverable contracts. 2. They are both FCY-INR, and FCY-FCY forwards 3. The forward premium measured by the difference between the forward and spot exchange rate can provide useful information about future exchange rates. 4. **Liquidity:** 1. The liquidity in forward market is mainly confined up-to one year with the share of forwards beyond 1-year remains very small and poses difficulties for market participants who want to hedge a long term forex exposure. 2. Further, the illiquidity also owes to the absence of a Rupee (term) interest rate swap market, and this makes it difficult for the market makers to price a long term forward contract 3. However, this concern can be negated practically by rolling over a short-term (say one year) contract till the maturity of the exposure which basically replaces the volatility risk of the spot exchange rate with the volatility risk of forward premia which is confined to a far narrower range. In other words, this strategy partially addresses their long term risk, reducing exchange rate risk to the risk of a less volatile forward premium. 4. While there has been no regulatory restriction put on bookings of longterm forwards as such, there is asymmetry in this segment in the sense that it is dominated by demand on the buy side. 5. **Volume** 1. The amount of outstanding forward contracts is far higher in comparison to open interest in the futures, which captures the extent of its use by the end-users for hedging. This could also be a pointer to the fact that notwithstanding many advantages that exchange traded products offer, OTC market is going to be the preferred domain of operations for the end-users in respect of, the forex derivative products where transactions are in the nature of relationship banking. 6. **Pricing:** 1. Covered interest parity - The forward premium measured by the difference between the forward and spot exchange rate can provide useful information about future exchange rates. According to covered interest parity, the interest differential between two countries equals the premium on forward contracts. Thus, if domestic interest rates rise, the forward premium on the foreign currency will rise and the foreign currency is expected to appreciate. The exchange rate defined as the price of foreign currency in domestic currency and the forward premium are therefore expected to be positively related. 7. **Drivers of premia:** 1. According to covered interest parity, the interest differential between two countries equals the premium on forward contracts. Thus, if domestic interest rates rise, the forward premium on the foreign currency will rise and the foreign currency is expected to appreciate. The exchange rate defined as the price of foreign currency in domestic currency and the forward premium are therefore expected to be positively related. 2. Higher the reserves, lower the forward premium, cheaper the future dollars* - So not just the cost of foreign currency borrowing, but also the forward premium which reflects the future price of a currency, and serves as a benchmark for hedging cost for corporates with foreign currency exposures (e.g., imports and/or foreign borrowings) also reduces. In the Indian context, there is a negative relationship between forward premia and the reserve cover of imports ([Chart 8](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941#C8)). 3. However, forex interventions in the form of forward purchases are found to be associated with increase in forward premia (RBI, 2021) [^5]. 4. ==Must Read - [What drives forward premia in forex market?](https://rbi.org.in/scripts/PublicationsView.aspx?Id=8834)== *RBI's Occasional Paper, Oct 23, 2006* 8. Non-deliverable foreign exchange derivative contracts (NDDCs) - This is discussed under NDDC 9. Settlement - forward trades with maturity of up to 36 months on residual basis are [settled](https://www.ccilindia.com/forexforwardintroduction-benefits) as CCP by Clearing Corporation (CCIL) effective from Dec 1, 2009 10. June 1, 2014 - All inter-bank forward transactions are compulsorily settled through CCIL 1. So CCIL settles all forex inter-bank Cash, Tom, Spot and Forward USD/INR transactions 11. Trades can be executed on CCIL's forex dealing system (like FX-Clear) or they can be concluded over-the-counter (OTC) and subsequently reported to CCIL for clearing and settlement 12. [FAQs](https://www.ccilindia.com/faq-forex-forward) on Forwards on CCIL's platform 13. [Forex Forward process](https://www.ccilindia.com/forex-forward-process) on CCIL's FX-Clear 14. Forward [Instrument](https://www.clearcorp.co.in/web/clearcorp/introduction2) on FX-CLEAR 1. Order Matching Mode: In outright forwards, 2 contracts are available - M1 End (last business day of next calendar month) and M2 End (last business day of the month after that). So on May 21, 2 contracts are June-end and July-end. >[Behaviour of Forward Premia](RBI_Research_DRG_20100225_Exchange%20rate%20policy%20and%20modelling%20in%20India.pdf#page=38&selection=3,0,3,27) in Exchange rate policy and modelling in India (DRG Studies, Feb 25, 2010) >[Box IX.3 Forex Forward Trade Compression](RBI_Annual%20Report_2014.pdf#page=134&selection=58,0,58,8) in RBI's Annual Report_2014 >[Box IV.2: Determinants of Forward Premia – A Macro-Finance Approach](RBI_Half-Yearly_Monetary%20Policy%20Report_202110.pdf#page=88&selection=90,0,90,67) in Monetary Policy Report Oct-2021 >[Box V.1 - Unauthorized Forex Trading Platforms](RBI_Annual%20Report_2023.pdf#page=141&selection=255,0,257,36) in RBI's Annual Report-2023 #### 3. Forex Swaps ^905fed 1. It is a derivative 2. It is traded based on swap points, that is premium or discount 3. *Trading:* 1. Instruments - There are several instruments on [FX-CLEAR](https://www.clearcorp.co.in/web/clearcorp/fx-clear2) for forex swaps (upto spot, spot-forward, forward-forward swaps): 2. Price for orders in the Cash and TOM segments is derived by adjusting the top-of-book spot rate with Cash/Spot or TOM/Spot swap quotes. 1. Up to the spot - Short tenor Swaps (3): 1. Cash/Spot - Today and T+2 2. Tom/Spot - Tomorrow and T+2 3. Cash/Tom swap - Today and Tomorrow - It is used when a bank needs to settle today but reverse exposure tomorrow, like for overnight adjustments, or holiday calendar mismatches. 4. Up to spot (also called near maturity swaps) are further discussed in this [note ](FX-Retail%20Platform.md) 2. Long tenor swaps (12): Spot over 12 month-end swaps (Spot over month-end dates) 3. Rolling Month Swaps: Spot over 1M, 2M, 3M, 6M, 9M, and 12M, etc. (Spot over exactly 30-day increments/same calendar date next month., spot over 60-day, etc..) 1. the far leg is calculated as exactly 1 month (or 2 months, etc.) from the Spot date. 2. They allow to rollover positions from month to month like November 15 to January 15 (spot/2M) 4. Quarter-end-over Quarter-Start: like end of first quarter to the start of Q2 1. These could be used for quarter-end demand/supply variations for hedges/square-off positions or rollover of foreign currency loans or to manage their balance sheet positions before submission of data for regulatory purposes, or for any accounting alignment. 5. LD/LD (Last Date/Last Date) (1) - Month 1 end to Month 2 end, like April 30 to May 31. 6. Outright forwards, 2 contracts are available in order matching mode - M1 End (last business day of next calendar month) and M2 End (last business day of the month after that). So on May 21, 2 contracts are June-end and July-end. 3. Swap trading happens on the basis of premium/discount quoted in paise like 23.25 paise is quoted which is Rs 0.2325. 1. $\displaystyle \text{Forward Premium/Discount} = (\text{Far Leg Exchange rate in Rupees} - \text{Near Leg Exchange rate in Rupees}) \times 100$ $\displaystyle = (83.15 - 83.00) \times 100 = 15 \text{ Paisa}$ 2. Actual yield in % p.a =$\displaystyle \text{Annualised Month End Forward Premia} = \left[ \frac{\text{Second Leg} - \text{Near Leg}}{\text{Near Leg}} \right] \times \left[ \frac{365}{\text{Leg-2 Settlement Date} - \text{Leg-1 Settlement Date}} \right] \times 100$ $\text{Day Count} = \displaystyle\frac{\text{Actual}}{\text{365 Fixed}}$ 4. Live rates on [FX-CLEAR](https://www.ccilindia.com/fx-clear), 5. Live rates on [Clearcorp](https://www.clearcorp.co.in/web/clearcorp/fx-clear1) 6. [FAQs](https://www.clearcorp.co.in/web/clearcorp/fx-clear-faq) on FX-CLEAR 7. **Example** - If an importer wants dollar today, bank cannot buy it outright from the inter-bank segment as there is no outright CASH or TOM segment. It enters into a swap to buy dollars today which it gives to the importer, and also buys dollar in the spot which it sells back to the counterparty of the swap and closes the swap. ^366c1f 1. An example: When a customer needs USD for same-day (cash) settlement and the bank cannot buy USD outright in the spot market, the bank enters a cash/spot swap in the interbank market to buy the dollars now. For example, if the spot (BID/ASK) rate is 84.30/84.32 and the inter-bank cash/spot swap quote is 32/45 paise, so the rates are 83.85/84. So on the cash leg (for same-day settlement) the bank buys USD at 84.00 (84.32 − 0.32). The bank adds its own margin of 3 paise to this cost of US dollar and the customer receives dollar for Rs 84.03. In other words, the bank has bought USD at 84.00 in the interbank market and sold it to the customer at Rs 84.03, earning 3 paise on the immediate leg as margin. With this, the swap quotes (cash/spot) of the bank to its customer becomes like 83.82/84.03 paise where banks' buy USD at 83.82 (and sell it in inter-bank market at 83.85) and sell at 84.03 (after buying it in inter-bank market at 84) to its customers. To complete the swap, that is to supply the dollars back in the second leg of the swap, the bank also enters into a spot (purchase) transaction along with cash/spot swap. On T+2, bank buys dollars in the spot, and sells it in the second leg of the swap and thus reverses the first leg of swap. 2. Thus, a cash/spot buy/sell swap + spot (purchase) enables the bank to meet the customer’s same-day dollar (purchase) requirement without taking a net open position beyond the same day (T+0). 3. In times of dollar outflows (strong dollar demand) when there large payments by foreign investors/importers, spot prices rise and so do the near leg (say cash) but the difference, that is the swap rates, decline. In other words, buyers of dollars are ready to pay premium for USD, that is pay more rupees, which can thus push down the 2-day implied rupee interest rates. 4. In times of excess dollars with banks, swap rates rise as banks look to park/invest these the surplus dollar funds, and overnight implied rupee interest rates based on the swap also increases. 8. They help to adjust settlement dates when holidays shift forward. 9. MTM settlement are based on [cash rates](https://www.ccilindia.com/documents/d/ccil/01032023-pdf) 10. [March 9, 2026](https://www.ccilindia.com/introduction-of-new-swap-instruments-beyond-12-months-on-fx-clear) - CCIL introduced new long-tenor swap instruments beyond 12 months on FX-CLEAR. These include standard Spot/Forward swaps (where Leg 1 is Spot and Leg 2 is on same date but 15, 18, 21, 24, 30, or 35 months later ), Spot/Month-End swaps (where Leg 1 is Spot and Leg 2 is on the final business day of that designated future month), and and Forward-Forward swaps (both legs happen in the future, like Month 12 over Month 18). #### 4. Currency Swaps 1. They are traded OTC 2. They are also called Cross-Currency Swaps or Cross-Currency Interest Rate Swaps 3. They are either FCY-INR swaps or FCY-FCY swaps 4. So there are 2 currencies involved, and in FCY–FCY swaps both are foreign currencies, like EUR–USD, with no INR. 5. These are the swap/conversion combinations based on position (liability/asset), currency (INR-to-FCY, FCY-to-FCY) and rate type (fixed/floating). 1. A fixed/floating INR liability can be converted to fixed/floating FCY liability *(give-FCY, take-INR)* 2. A fixed/floating FCY liability can be converted to fixed/floating INR liability *(give-INR, take-FCY)* 3. A fixed/floating FCY liability can be converted to fixed/floating FCY liability *(give-FCY-1, take-FCY-2, and vice versa)* 4. A fixed/floating FCY asset can be converted to fixed/floating INR asset *(give-FCY, take-INR)* 5. A fixed/floating INR asset can be converted to fixed/floating FCY asset *(give-INR, take-FCY)* 6. A fixed/floating FCY asset can be converted to fixed/floating FCY asset *(give-FCY-1, take-FCY-2, and vice versa)* 6. Usually, liabilities like a long-term FCY borrowing (by ECB borrowers, case-3) or a long-term INR borrowing (case-1) is converted. 1. Long term foreign currency - rupee swaps act as a hedging tool facilitating switching of foreign currency liability to domestic liability and vice versa. Indian corporates which are borrowers of long term foreign currency loans and those engaged in implementing turnkey projects overseas are able to properly manage their foreign exchange and interest rate risks and reduce overall cost by using this product. 7. [Nov 24, 2001](RBI_Press%20Release_2001124_Foreign%20Currency%20-%20Rupee%20Swaps.pdf) - RBI increased the limit for unmatched currency swaps without any prior permission 8. [Feb 13, 2015](RBI_Notification_20150213_Risk%20Management%20and%20Inter%20Bank%20Dealings-%20Foreign%20Currency%20(FCY)%20–%20INR%20Swaps.pdf) - RBI permitted to re-enter into a fresh FCY-INR swap to hedge the (same) underlying but only after the expiry of the tenor of the original swap contract that had been cancelled. #### 5. Options 1. OTC - Effective July 7, 2003, RBI authorised dealers to offer foreign currency-rupee (FCY-INR) options but cross-currency ones were available since 1993. 1. In a Foreign Currency-INR (FCY-INR) options contract, the Indian Rupee (INR) is the quote currency (or counter currency). This means one is buying or selling the foreign currency using INR as the reference. 2. [Exchange](Currency%20Futures%20&%20Options.md) traded Options- They were introduced for the first time on October 29, 2010 on NSE. ##### Summary 1. OTC forex market includes both spot and derivatives 1. Spot forex is not a derivative (simple buy/sell of currency) 2. All others OTC FX products are derivatives: 1. Foreign exchange forward (outright forex forwards), FCY-INR, FCY-FCY forwards 2. [Foreign exchange swap](Forex%20Swaps.md); (forex swaps, also called spot-forward swaps), 3. Currency swap; (cross-currency swaps, FCY-INR, FCY-FCY swaps) *(2 different currencies)* 4. Foreign exchange call/put option (European) (forex/currency options) ### 1.2 Cash-Settled/Non-Deliverable Forex Derivatives - Non-deliverable derivative contract (NDDC)’ means an OTC foreign exchange derivative contract in which there is no delivery of the notional amount of the underlying currencies of the contract and which is cash settled. #### 1. Offshore & Onshore 1. [Feb 29, 2019](RBI_Press%20Release_20190228_RBI%20constitutes%20the%20Task%20Force%20on%20Offshore%20Rupee%20Markets.pdf) - The Task Force on Offshore Rupee Markets, set up by the Reserve Bank of India 1. Aug 8, 2019 - Task Force on Offshore Rupee Market submitted its [report](RBI_Report_20190808_Report%20of%20the%20Task%20Force%20on%20Offshore%20Rupee%20Markets.pdf) to RBI. 2. [January 6, 2020](RBI_Notification_20200106_Risk%20Management%20and%20Inter-bank%20Dealings-%20Permitting%20AD%20Cat-I%20banks%20to%20voluntarily%20undertake%20user%20and%20Inter-Bank%20transactions%20beyond%20onshore%20market%20hours.pdf) - After accepting suggestions of the Task Force on Offshore Rupee Market, RBI allowed banks (AD-I) to undertake transactions beyond the on-shore market hours.  2. [Aug 08, 2019](RBI_Press%20Release_20190808_Task%20Force%20on%20Offshore%20Rupee%20Markets%20submits%20report%20to%20the%20Governor.pdf) - Task The Task Force on Offshore Rupee Markets submitted its report 3. [January 20, 2020](RBI_Notification_20200120_Introduction%20of%20Rupee%20derivatives%20at%20International%20Financial%20Services%20Centres%20(IFSC)%20copy.pdf) - RBI allowed ETCD, traded in exchanges in GIFT City IFSC to be settled in foreign currency, 1. May 8, 2020 - the two IFSC Exchanges, India International Exchange Limited (India INX) and NSE IFSC Limited (NSE IFSC), launched INR forex derivative contracts, specifically USDINR currency futures and options, settled in USD. 4. [March 27, 2020](RBI_Notification_20200327_Risk%20Management%20and%20Inter-bank%20Dealings-%20Participation%20of%20Banks%20in%20Offshore%20Non-deliverable%20Rupee%20Derivative%20Markets.pdf) - Effective June 1, 2020, RBI [allowed](RBI_MPS_SDRP_20200327.pdf) AD Cat-I banks operating IFSC Banking Units (IBUs) banks to transact non-deliverable derivative contracts (NDDCs involving Rupee, or otherwise) with non-residents *(offshore)* and each other, or but settled in foreign currency. 1. Until this, banks were NOT allowed to participate in offshore non-deliverable Indian Rupee derivative market (specifically offshore NDF Rupee Market). 2. RBI allowed Indian banks to undertake such transactions with non-residents through IFSC Banking Units (IBUs) in (GIFT City), branches in India, foreign branches or branches of the parent bank in case of foreign bank operating in India) in the massive offshore global NDF market, located in cities like London, Singapore, Dubai, etc. 3. From more than 100 paise in March 2020, spreads came down to zero/near zero (negative on a few occasions), since June 1, with banks arbitraging away the pricing differentials between onshore and offshore markets. Thus, the participation of Indian banks in the NDF market appears to have positively impacted the price differential between offshore and onshore rates 5. ==Thus RBI reduced volume in overseas/offshore rupee trading by:== 1. extending trading hours 2. allowing dollar-settled ETCD in IFSC stock exchanges 3. allowing AD-Cat I banks having IBUs to offer non-deliverable rupee forex derivatives *(mostly NDF in USDINR)* to non-residents through IFSC Banking Units (IBUs) in (GIFT City), branches in India, foreign branches or branches of the parent bank in case of foreign bank operating in India) in the massive offshore global NDF market, located in cities like Singapore, Hong Kong, London, Dubai, New York etc. 6. [June 06, 2023](RBI_Notification_20230606_Risk%20Management%20and%20Inter-Bank%20Dealings%20-%20Non-deliverable%20derivative%20contracts%20(NDDCs).pdf) 1. To develop the *onshore* (to residents) non-deliverable derivative market, RBI allowed banks AD Cat-I banks IFSC IBUs to offer NDDCs (involving INR) to resident non-retail users, but mandatorily settled in INR. 2. NDDCs between two AD Cat-I banks, and between an AD Cat-I bank and a non-resident can be settled in INR or any foreign currency. 3. So NDDCs definition was changed and it need not involve Rupee. 7. [April 1, 2026](RBI_Notification_20260401_Risk%20Management%20and%20Inter-Bank%20Dealings%20(Revised).pdf) - RBI barred ADs (AD Category-1 banks and Standalone Primary Dealers (SPDs) holding a Category-III license) to offer Rupee NDDCs (Non-deliverable foreign exchange derivative contract involving Rupee) to both resident and non-resident users, for all purposes, to manage the [volatility](Measures%20to%20stabilise%20the%20exchange%20market.md#2026) in the exchange rate arising from the speculative trading in onshore & offshore (that is, by non-residents and residents respectively) non-deliverable rupee forex derivatives. 8. **Present framework** 1. Authorised Dealer Category-I banks having an IFSC Banking Unit (IBU) and Standalone Primary Dealers authorised as Authorised Dealer Category-III are allowed to transact with each other, and overseas banks 2. Authorised Dealer Category-I banks with an operating IFSC Banking Unit and Standalone Primary Dealers authorised as Authorised Dealer Category-III may offer NDDCs involving INR to: 1. resident users for the purpose of hedging and 2. to non-resident users without any restriction in terms of purpose 3. NDDCs involving INR 1. resident - only for hedging, settled strictly in INR 2. non-residents - no restriction in terms of purpose, INR or FCY settled 4. NDDCs (also DDCs) not involving INR - can be offered without restriction in terms of purpose. 1. resident - other than hedging to be settled in INR, *(for hedging purpose, it would naturally be settled in the quote currency)* 2. non-residents - other than hedging to be cash-settled in INR or any foreign currency 5. While Indian banks transact in both non-deliverable forward and option contracts, forward contracts so far dominate with most contracts being short tenure contracts of maturity of about a week. Mostly USD/INR currency pair is traded, volumes are concentrated in the interbank segment, by banks in India having branches in Mumbai or IBUs, with some interest interest from global funds and corporates based out of London, Singapore and Hong Kong. [^8] 9. USD-settled - This [[NDF - Non-deliverable Forwards (involving Rupee)|note]] discusses about the ==offshore NDF market.== >1. [Report](RBI_Report_20190808_Report%20of%20the%20Task%20Force%20on%20Offshore%20Rupee%20Markets.pdf) of Task Force on Offshore Rupee Market dated August 8, 2019 >2. Does Offshore NDF Market Influence Onshore Forex Market? Evidence from India. RBI WPS (DEPR). [Link](https://rbi.org.in/scripts/PublicationsView.aspx?Id=20388#FO@)| [pdf](RBI_Research_Working%20Paper%20Series_2108_Does%20Offshore%20NDF%20Market%20%20Influence%20Onshore%20Forex%20Market?%20%20Evidence%20from%20India_RBI.pdf) >3. Onshoring the Offshore. RBI Bulletin, Aug 13, 2020. [pdf](RBI_Monthly_Bulletin_Article_20200813_Onshoring%20the%20Offshore.pdf) ### 1.3 Electronic Trading Platform (ETP) 1. 1. ‘Electronic Trading Platform’ (ETP) shall mean any electronic system, other than a recognised stock exchange, on which transactions in eligible instruments as defined herein are contracted. 2. Both cash and physically-settled OTC 'eligible' instruments (*securities, money market instruments, foreign exchange and derivatives covered under section 45W of the RBI Act, 1934)* can be available on an ETP. FX-Clear is one of the [authorised](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4080) of ETP. 3. [Oct 12, 2017](RBI_Press%20Release_20171012_RBI%20releases%20Draft%20Directions%20regarding%20Framework%20for%20Authorisation%20of%20Electronic%20Trading%20Platforms%20under%20section%2045%20W%20of%20the%20RBI%20Act,%201934.pdf) - RBI released Draft Directions regarding Framework for Authorisation of Electronic Trading Platforms under section 45 W of the RBI Act, 1934 4. [Oct 5, 2018](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11385&Mode=0) - The Electronic Trading Platforms (Reserve Bank) Directions, 2018 was released 5. [Feb 08, 2024](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57275) - In SDRP, RBI announced [review](RBI_MPS_SDRP_20220408.pdf) of 2018 directions on ETP 6. [April 29, 2024](RBI_Press%20Release_20240429_RBI%20releases%20Draft%20Master%20Direction%20–%20Reserve%20Bank%20of%20India%20(Electronic%20Trading%20Platforms)%20Directions,%202024.pdf) - [RBI released](https://economictimes.indiatimes.com/markets/stocks/news/rbi-issues-draft-framework-for-electronic-trading-platforms/articleshow/109701738.cms?from=mdr) a draft Master Direction on ETP. 1. It had very comprehensive provisions for offshore ETPs. 7. June 16, 2025 - Master Direction – [Reserve Bank of India (Electronic Trading Platforms) Directions, 2025](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12870) was released 1. RBI removed all specific provisions related to offshore ETPs in the final directions, effectively shifting its regulatory focus exclusively onto domestic markets 8. [List of authorised Electronic Trading Platforms (ETPs)](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4080) ### Benefits of OTC Products 1. Their bespoke nature imparts flexibility to cater to specific requirements of any market participant. [^4] 2. Further, the OTC market acts as a nursery for new products and has remained the major source of product innovation. 3. Again, in a market that is essentially wholesale in nature and confined to a few large participants, an OTC trade may offer cost /price advantage in comparison with its exchange traded alternative. ## 2. ETCD - Futures and Options 1. This [[Currency Futures & Options|note]] has more details. 2. Foreign Portfolio Investors (FPIs) were allowed to participate in the exchange traded currency derivatives (ETCD) on June 20, 2014 for the purpose of hedging the currency risk arising out of the market value of their exposure to Indian debt and equity securities. > FAQs - Foreign Exchange (Forex) Transactions We can also classify the foreign exchange market into spot and derivative markets # By Type of Market: ## 1. Spot ## 2. Derivatives 1. A generic derivative ==(forex derivatives are *italicised*)== would be 1. Forward rate agreement; 2. *Foreign exchange forward*; 3. [Interest rate swap](Interest%20Rate%20Derivatives%20(IRDs)%20(Rupee).md#1.%20Interest%20Rate%20Swaps%20(IRS)) (INR-IRS or FCY-IRS); 4. *[Foreign exchange swap](Forex%20Swaps.md);* *(also called forex swaps)* 5. *Currency swap (also called cross currency swap or cross-currency interest rate swap, FCY-INR or FCY-FCY swaps);* 6. [Credit default swap](Credit%20Derivatives%20in%20India.md); 7. Interest rate call/put option (European); 8. Interest rate cap (European); 9. Interest rate floor (European); 10. *Foreign exchange call/put option (European) (currency options); and 11. [Bond Forward](Interest%20Rate%20Derivatives%20(IRDs)%20(Rupee).md#5.%20Bond%20Forward%20(Forward%20contract%20in%20G-Secs)) 2. Since the economy getting exposed to risks arising out of changes in exchange rates, the derivative segment of the foreign exchange market has also strengthened and the activity in this segment is gradually rising. 3. These are ETCD like currency futures and options or OTC derivatives like swaps, forwards, and offshore-NDF. 4. The linear ones are (forwards and futures) and non-linear are options, exchange traded as well as OTC. The latter is mostly plain vanilla. 5. Derivatives evoke extreme reaction – from ‘the most significant event in finance’ (Greenspan) to ‘weapons of mass destruction’ (Buffet) or ‘license to kill’ (Soros). [^1] 6. **Hedging:** 1. The primary purpose of derivatives is to hedge against future uncertainties. Thus the access to the derivative markets is basically available for hedging. 2. they perform economically a hugely useful function in enabling agents to make better inter-temporal decisions. 3. All economic agents – residents or non-residents - who have an exposure arising out of any permitted transaction have access to the derivative market – both OTC as well as exchange traded – on the strength of such underlying exposure. 4. Exchange-traded currency derivatives (ETCD) allowed even without underlying exposure ( but within limits). 5. ==The [Section 1](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485#C2:~:text=FOREIGN%20EXCHANGE%20TRANSACTIONS-,SECTION%20I,-1Facilities%20for) in Master Direction - Risk Management and Inter-Bank Dealings covers the facilities for Persons Resident in India (other than Authorised Dealers) and for Persons Resident outside India.== 6. **Challenges in Hedging:** ^bb6edc 1. **Cost:** Another facet of the problem is unhedged exposure. Hedging has a [cost](ECB%20(Borrowings%20in%20Rupee%20and%20FCY).md#^931ee1) 2. **Hedging is motivated by their expectations of the future spot rate:** 1. While the pricing of these derivatives (forwards and futures) are fairly simple based on the interest rate differentials and the payoffs are simple and linear, the use of these products by the market participants is mostly motivated by their expectations of the future spot rate. 2. **MTM losses:** 1. Ordinarily [^2], if you have a foreign exchange receivable or payable and if you have entered into a forward sale or buy contract, your exposure is evened out and you should not be bothered about what happens to the exchange rate. 2. In other words, a corporate entering into a derivative contract as a perfect hedge should be indifferent to the price movements during the period of the contract as any MTM loss in the derivative contract should be near equal to the MTM gains in the underlying. If, however, different accounting norms are followed for both the hedged item as well as the hedging instrument, there could be a possibility of timing mismatch in the profit and loss statement resulting into undue volatility in the bottom line of the corporates 3. However, the concept of mark-to-market is not only in the books of accounts but also in the people’s minds. Not unexpectedly, a cloth manufacturer and exporter decides her hedging strategy based on her own view of the expected future spot price as different from the forward price and of course often based on advice of “experts”. 4. As I have mentioned earlier, the foreign exchange rate exhibits random walk in the short run and the best prediction of tomorrow’s rate is today’s rate. 5. The above point can also be analysed this way [^3] - Related to hedging from the accounting aspect is the issue of marking to market all the outstanding derivative contracts i.e. recording the value of outstanding financial contracts at fair value. In recent times, given the volatility of Rupee much press coverage has been directed towards the Marked To Market (MTM) losses of corporates. The MTM is dynamic in nature and changes in line with market movements and represents the replacement cost of the derivative contracts.  These accounting losses should therefore be looked at in totality along with the economic rationale of the hedges undertaken wherein the corporate had decided to lock in to a definite price and to forego the inherent forex risk. 3. About ‘expert’ advices, I can only paraphrase Samuelson’s famous words, _“To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.”_ [3](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1008#A3) Now, after having booked a forward contract, one tracks the path of the spot rate and starts revelling or repenting about the imagined gains or losses! 3. **Hedging with non-linear products:** 1. The other way of hedging risk is by using non-linear derivative options. Once non-linearity is brought into hedging strategy, the universe becomes virtually unlimited. Any combination of linear derivatives will still have linear payoffs. But combination of non-linear derivatives with themselves or with linear derivatives can result in payoffs of varying complexity. Such complex products along with a future that is shrouded in ignorance can have pretty unpleasant outcomes and sometimes even threaten market stability. 2. Hence a careful selection of hedging instruments is must. Many corporates, large and small, burnt their fingers dabbling in complex derivative products. Many leant, the hard way, that there are no free lunches and that “zero cost structures” and “unlimited payoffs” are but figments of fertile imagination 4. ==More on hedging [here](ECB%20(Borrowings%20in%20Rupee%20and%20FCY).md#^931ee1) 7. **Speculation:** 1. Derivatives essentially facilitate inter-temporal transfer of demand and supply. 2. Thus they can be used as instruments of speculation, that is express future expectations or views as traders call it, and can obfuscate risk allocation. 3. These views can be expressed rather cheaply inasmuch as one does not have to finance a speculative inventory. 4. Low and stable interest rates can act as incentives for increasing leverage. But the risks associated with excessive leverage have very clearly been brought out by the crisis of 2008. 5. As Garber notes, ‘The problems associated with rise of derivatives stem partly from the same source as the benefits: 1. the increased ability to separate and market risks means that *some counterparties can assume riskier positions more readily than in the past.’* 2. The other part of the source of the problem with derivatives is that they can be *incomprehensibly complex making the risk implications opaque.* 8. Thus there are regulatory constraint in terms of 3 restrictions-products, participants and participation. 9. RBI's approach has been and will continue to be to provide an agent who has exposure to the Rupee – resident or non-resident - with a range of derivative products to enable them to hedge their foreign exchange risks. 10. RBI does not intend to completely delinking the access to derivative markets from underlying exposure, but efforts to facilitate operationally easy and economically efficient hedging shall continue. # Participants 1. Players in the Indian market include: 1. [[#^b79c39|Authorised Dealers (ADs)]], mostly banks who are authorised to deal in foreign exchange. 2. foreign exchange brokers (they now dominate the derivatives market) who act as intermediaries between counterparties, matching buying and selling orders and 3. customers – individuals, corporates/merchants, who need foreign exchange for trade and investment purposes. 1. The merchant segment of the spot market is generally dominated by the Government of India, select public sector units, such as Indian Oil Corporation (IOC), and the FIIs. 4. RBI - who uses foreign exchange to manage reserves and intervenes to ensure orderly market conditions. # Issues We will discuss here just one issue- Why restrictions in the foreign exchange market exist? 1. **Why we can't allow free market process in foreign exchange markets?** 1. If free market process is the best way of organising economic activity why then should this principle not extend to the foreign exchange markets and why should there be any regulation at all? 2. Markets have limits and there are market failures - from factors such 1. an monopoly or non-competitive markets, 2. externality, 3. information asymmetry, etc. 4. financial and macro-economic stability issues, which have come to the fore post the turbulence of past seven-eight years 5. the evolving nature of foreign exchange itself - In recent years, foreign exchange has come to be viewed as an asset class in its own right, one that often thrives on volatility. Currency movements are no longer merely a byproduct of trade and investment flows but currencies now move for their own sake. But currencies as assets, like fire, cannot exist on their own; just as fire needs fuel, currencies require underlying asset classes like bank deposits, bills, notes, or bonds — and hence their movements affect and are affected by other financial markets 3. Foreign exchange derivatives: 1. They can be used as means of speculation. 4. Thus an unrestricted currency market can lead to volatility in exchange rate as well as currency inflows and outflows. 2. **What would have been if unfettered currency trading is allowed? Some of the consequences could be:** 1. Volatility in the currency. 1. The exchange rate is an important macro-economic variable that impacts a country’s trade and investment directly and the entire macro-economic condition indirectly. The magnitude, direction and exact nature of the impact of exchange rate movements can be debated. 2. It also creates impact on the sentiments which often drive reactions in the public, the press and even among those who are supposed to know better. 2. Loss of control over monetary management of the economy. 1. The Mundell-Fleming ‘Trilemma’ is well known. If, with an open capital account (that is desiring free capital mobility) – which is what a free foreign exchange market shall mean – you intend to interfere with the market determined exchange rate (that is try to guide rates or have fix rates), you will have to sacrifice your freedom to set the interest rate. Obviously this is not a viable choice. 3. Non-deliverable derivative contracts - Here the risk is volume going out to offshore market rather than vice versa. 4. So what is a workable compromise? Some restriction on capital account (limited capital controls) which translates to the restrictions on the foreign exchange market seems the easiest of choices which several countries including India adopted. 5. The Indian bond and currency markets are also beset with many such structural frictions - large government borrowings, bank dominated financial intermediation, etc. 6. [Unauthorized Trading in Forex Platforms](Unauthorized%20Trading%20in%20Forex%20Platforms.md) # FEDAI 1. Before 1958, only a few foreign banks, under the Foreign Exchange Regulation Act (FERA), 1947, in India were allowed to handle foreign exchange (forex) business. 2. The terms and conditions for undertaking such business were being laid down by the then Exchange Banks’ Association. 3. With the increase in India’s foreign trade, several scheduled commercial banks were authorized by the Reserve Bank to deal in foreign exchange business, to make foreign exchange operations more broad-based. 4. With this gradual entry of Indian banks, the FEDAI was formed on August 16, 1958. 5. Those were days of calm market. *The Bretton-Woods arrangement was in force, there was a fixed exchange rate regime with Rupee pegged to the pound sterling and tranquillity reigned in the markets, such as there were [^2].* 6. The mandate was to lay down the terms and conditions for the Authorized Dealers (ADs) - *setting the basic rules for inter-bank and customer transactions pertaining to computation of rates and settlements.* 7. It is a self-regulatory body (though not formally designated as one) for banks dealing in foreign exchange, liaisoning with the RBI (as a norm-setter) to frame and revise rules for its members on the conduct of the inter-bank foreign exchange transactions, and playing an important role as an educator. ^b79c39 1. It has led to uniform practices for interbank transactions as well as banks’ transactions with the public. 2. It played major role countrywide during the transition phases involving both fixed to floating rates and from FERA to FEMA in facilitating the change. 3. Its members are [authorised dealers](https://rbi.org.in/scripts/FAQView.aspx?Id=54#1) (forex) that have been authorised/licensed by the RBI under Section 10(1) of the FEMA Act to [deal](https://www.rbi.org.in/scripts/category.aspx) in foreign exchange. 4. Reserve Bank, currently, issues authorisation under Section 10(1) (sub-section (1) of section 10 of the FEMA) of the FEM Act, 1999 (Act 42 of 1999), to the following *different categories:* ^548b72 1. select banks (as [Authorised Dealers Category-I](https://rbi.org.in/scripts/Category.aspx)) to carry out all permissible current and capital account transactions as per directions issued from time-to-time. They are all scheduled commercial banks, which include Public sector banks, private sector banks and foreign banks operating in India. 2. select entities (as **Authorised Dealers Category-II**) to carry out specified non-trade related current account transactions, all the activities permitted to Full Fledged Money Changers and any other activity as decided by the Reserve Bank. 1. They are all the upgraded full fledged money changers (FFMCs) and select Regional rural banks and cooperative banks. 2. In order to provide adequate foreign exchange facilities and efficient customer service, the Reserve Bank has decided to grant licenses to certain entities by authorising them as Authorised Dealer – Category II to release/remit foreign exchange for the non-trade current account transactions mentioned in [Master Direction - Other Remittance Facilities](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#C23) 3. select financial and other institutions (as **Authorised Dealers Category-III**), such as EXIM bank, to carry out specific foreign exchange transactions incidental to their business / activities 4. select registered companies as **Full Fledged Money Changers (FFMC)** to undertake purchase of foreign exchange and sale of foreign exchange for specified purposes viz. private and business travel abroad. 5. All of them are collectively called *Authorised Persons (ADs and FFMCs)*. 6. Related - [Master Direction - Money Changing Activities (Updated as on November 28, 2025)](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11518) 7. FAQ - [Money Changing Activities](https://rbi.org.in/scripts/FAQView.aspx?Id=54#1) 5. It provides foreign exchange related banking expertise across the country which has led to significant improvement in the customer service. 8. The setup of Sodhani Committee in 1994 and enactment of FEMA in 1999 provided further fillip to the development of the foreign exchange market which can be gauged from the rise in the average daily forex market turnover from approximately US$ 6 billion in 2001 to nearly US$ 60 billion in 2010-11. 9. FEDAI played an important role in supporting the Reserve Bank in implementing these pioneering measures and suggestions aimed at major reforms in the market. It can thus be credited with the smooth transition and transformation experienced by the Indian foreign exchange market over the years. # Timings 1. [Feb 3, 2011](RBI_Press%20Release_20110203_RBI%20revises%20Internal%20Control%20Guidelines%20for%20Forex%20Business.pdf) - Guidelines for ‘Internal Control over Foreign Exchange Business’ was revised 2. [July 10, 2019](RBI_Group-Committee_20190710_Report%20of%20the%20Internal%20Working%20Group%20on%20Comprehensive%20Review%20of%20Market%20Timings.pdf) - RBI released the report of the internal working group on comprehensive review of market timings. 1. The key aspects of this report are [[Report of the Internal Working Group on Comprehensive Review of Market Timings 2019|here]]. 3. [Jan 6, 2020](RBI_Notification_20200106_Risk%20Management%20and%20Inter-bank%20Dealings-%20Permitting%20AD%20Cat-I%20banks%20to%20voluntarily%20undertake%20user%20and%20Inter-Bank%20transactions%20beyond%20onshore%20market%20hours.pdf) - Inter-bank USD/INR forex transactions happen between 9 am to 5 pm. But after accepting suggestions of the [[RBI_Report_20190808_Report of the Task Force on Offshore Rupee Markets.pdf|Task Force on Offshore Rupee Market (August 8, 2019)]], RBI allowed banks (AD-I) to undertake transactions beyond this on-shore market hours. This is different from settlement timings. 1. While volumes are not significant, we do see banks transacting both prior to and post onshore market hours. Such trading, however, is largely confined to the period immediately before and after domestic FX market hours, suggesting that we are still some distance away from a true 24\*5 market. [^6] 4. May 02, 2025 - RBI released the [report](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1292) of the Working Group on Comprehensive Review of Trading and Settlement Timings of Markets Regulated by the Reserve Bank 5. [Feb 17, 2026](RBI_Press Release_20260217_RBI releases draft Directions on Foreign Exchange Dealings of Authorised Persons.pdf) - draft Directions on Foreign Exchange Dealings of Authorised Persons ## Facts 1. India’s onshore foreign exchange (forex) market is primarily a wholesale market, dominated by banks, forex brokers and corporate clients. Individuals, the government and the central bank generally transact through banks. 2. Forex trading typically takes place over-the-counter (OTC) for spot, forward and swaps. 1. As a result of various measures over last two decades, liquidity in the foreign exchange market increased significantly. 2. The average daily OTC turnover has increased from about USD 5 billion in 2004 to USD 34 billion in 2019 ([Chart 1](https://rbi.org.in/scripts/PublicationsView.aspx?Id=20388#C1)). 3. Options and futures - They are traded on exchanges, i.e., National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange of India Ltd. (MSE). The clearing houses of respective exchanges act as counterparty to all contracts and set margin requirements. 1. The exchange traded forex derivatives have shown exponential growth though the daily average turnover still remains much lower at about USD 9.5 billion during 2019 and about USD 12.2 billion in March 2020. 4. The daily average turnover in the Indian foreign exchange market has seen almost a ten-fold rise during the 10 year period from 1997-98 to 2007-08 from USD 5 billion to USD 48 billion *(Dua & Ranjan, 2010, [Exchange Rate Policy and Modelling in India](https://rbi.org.in/scripts/PublicationsView.aspx?id=12252)).* 5. The pickup has been particularly sharp from 2003-04 onwards since when there was a massive surge in capital inflows. 6. It is noteworthy that the increase in foreign exchange market turnover in India between April 2004 and April 2007 was the highest amongst the 54 countries covered in the latest Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS). 7. According to the survey, daily average turnover in India jumped almost 5-fold from US $ 7 billion in April 2004 to US $ 34 billion in April 2007; global turnover over the same period rose by only 66 per cent from US $ 2.4 trillion to US $ 4.0 trillion. 8. **Factors for development:** 1. Apart from the macro-economic and external factors, these measures by RBI has helped development of FX market 1. simplification of procedures, 2. development of market infrastructure, 3. availability of several new products and 4. extension of forex transaction timings beyond onshore market hours. 2. All these have given market participants greater flexibility to undertake foreign exchange operations and to manage their risks. # Groups and Committees 1. 2005 - [Report](RBI_Group-Committee_20050624_Report%20of%20the%20Internal%20Technical%20Group%20on%20Forex%20Markets.pdf) of the Internal Technical Group on Forex Markets 2. July 10, 2019 - [Report of the Internal Working Group on Comprehensive Review of Market Timings 2019](Report%20of%20the%20Internal%20Working%20Group%20on%20Comprehensive%20Review%20of%20Market%20Timings%202019.md) 3. [May 25, 2011](RBI_Press%20Release_20110525_RBI%20releases%20the%20Report%20of%20the%20Working%20Group%20on%20Reporting%20of%20OTC%20Interest%20Rate%20and%20Forex%20Derivatives.pdf) - RBI released the [report](RBI_Group-Committee_20110525_Report%20of%20the%20Working%20Group%20on%20Reporting%20of%20OTC%20Interest%20Rate%20and%20Forex%20Derivatives.pdf) of the Working Group on Reporting of OTC Interest Rate and Forex Derivatives 4. [07 Feb 2014](RBI_Group-Committee_20140306_Implementation%20Group%20on%20OTC%20Derivatives%20Market%20Reforms.pdf) - Implementation Group on OTC Derivatives Market Reforms 5. Oct 12, 2017 - Discussion paper on foreign exchange trading platform for retail participants. [Link](https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=879) 6. August 8, 2019 - Task Force on Offshore Rupee Market submitted its [report](RBI_Report_20190808_Report%20of%20the%20Task%20Force%20on%20Offshore%20Rupee%20Markets.pdf) to RBI 7. May 2, 2025 - [Report](RBI_Group-Committee_20250502_Working%20Group%20on%20Comprehensive%20Review%20of%20Trading%20and%20Settlement%20Timings%20of%20Markets%20Regulated%20by%20the%20Reserve%20Bank.pdf) of the Working Group to undertake a comprehensive review of trading and settlement timings of markets regulated by the Reserve Bank. # Related Notes 1. [FX-Retail Platform](FX-Retail%20Platform.md) 2. [Forex Swaps](Forex%20Swaps.md) 3. [Currency Futures & Options](Currency%20Futures%20&%20Options.md) 4. # Related data releases #forexdata 1. This [[Data Releases - External Sector|table]] has list of reports on external sector by RBI. # Regulations 1. Foreign Exchange Derivative Contracts, Overseas Commodity & Freight Hedging, Rupee Accounts of Non-Resident Banks and Inter-Bank Foreign Exchange Dealings etc. 1. [[Foreign Investment in India (Various Routes)#Master Directions|Link]] 2. External Commercial Borrowings, Trade Credits and Structured Obligations 1. [[ECB (Borrowings in Rupee and FCY)#Regulations|Link]] 3. **Money Changing Activities** 1. January 1, 2016 - [Master Direction - Money Changing Activities](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11518) 2. January 1, 2016 to December 8, 2017 - [Master Direction - Money Changing Activities](RBI_Master%20Directions_20160101_Master%20Direction%20-%20Money%20Changing%20Activities%20(Last%20Updated%20as%20on%20December%208,%202017).pdf) 3. FAQ - [Money Changing Activities](https://rbi.org.in/scripts/FAQView.aspx?Id=54#1) 4. **Foreign Exchange Dealings of Authorised Persons** 1. [Feb 17, 2026](RBI_Press Release_20260217_RBI releases draft Directions on Foreign Exchange Dealings of Authorised Persons.pdf) - draft Directions on Foreign Exchange Dealings of Authorised Persons 2. Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May 03, 2000 ([Notification No. FEMA.25/RB-2000 dated May 03, 2000](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=179&Mode=0)), as amended from time to time and the 3. Instructions contained in Part A (Section III) and Part C of the [Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485), as amended from time to time. 4.  [Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12163) 5. [Reserve Bank of India (Financial Benchmark Administrators) Directions, 2023](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12581), dated Dec 28, 2023 6. **Directions for OTC derivatives** ^eca5a1 1. Foreign Exchange Derivatives 1. [FEM (Foreign Exchange Derivative Contracts) Regulations, 2000](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=179&Mode=0), dated May 3, 2000 2. [Master Direction – Risk Management and Inter-Bank Dealings](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485), dated July 05, 2016, as amended from time to time, for foreign exchange derivatives. 2. Interest Rate Derivatives 1. [Reserve Bank of India (Rupee Interest Rate Derivatives) Directions, 2025](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=13214), dated Dec 08, 2025 1. It contains directions on Rupee interest rate derivatives transactions undertaken on recognized stock exchanges and Over-the-Counter (OTC) markets, including on electronic trading platforms (ETPs). 2. It supersedes [June 26, 2019](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11602) - Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 2. [Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=12784), dated February 21, 2025 3. Credit Derivatives 1. [Reserve Bank of India (Credit Derivatives) Directions, 2022](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12226#MD), dated February 10, 2022, as amended from time to time, for credit derivatives. 4. [Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12163), dated Sept 16, 2021 5. [Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 2024](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12682), dated May 8, 2024 7. Services by Banks 1. [Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=13162), dated November 28, 2025 2. [Reserve Bank of India (Financial Services provided by Banks) Directions, 2016](RBI_Master%20Direction_20160526_Master%20Direction-%20Reserve%20Bank%20of%20India%20(Financial%20Services%20provided%20by%20Banks)%20Directions,%202016_Updated%20as%20on%20August%2010,%202021.pdf) *(withdrawn)*, dated May 26, 2016 8. [==Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks ](RBI_Notification_20101228_Comprehensive%20Guidelines%20on%20Over%20the%20Counter%20(OTC)%20Foreign%20Exchange%20Derivatives%20and%20Overseas%20Hedging%20%20of%20Commodity%20Price%20and%20Freight%20Risks.pdf)(last Dec 28, 2010) *Withdrawn==* 9. Master Direction – [Reserve Bank of India (Electronic Trading Platforms) Directions, 2025](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12870), dated June 16, 2025 10. **FAQs** 1. [FAQs](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=3347) - Foreign Exchange (Forex) Transactions 2. [FAQs](https://www.rbi.org.in/Scripts/FAQDisplay.aspx?dId=47960) related to the forex exchange management ## References ### [[Speeches & Media Interactions|Speeches]] 1. Shyamala Gopinath. (Aug 13, 2005). Recent Developments in Forex, Money and G-Sec Markets: Account and Outlook. (by Shyamala Gopinath* Deputy Governor at the 16th National Forex Assembly at Cochin on August 13, 2005). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=207) 2. Udesh, K.J. (2004, August 20). *Development of Forex Markets in India : Review and Prospects* \[Speech\]. Reserve Bank of India. 15th Forex Assembly organized by Forex Association of India in Colombo, Sri Lanka 3. Mohan, R. (2006). *Central Banks and Risk Management: Pursuing Financial Stability* \[Speech\]. 4th Annual Conference on Cash, Treasury and Risk Management in India on November 21, 2006 at New Delhi. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=316) | [[RBI_Speeches_061121_Central Banks and Risk Management- Pursuing Financial Stability_Rakesh Mohan.pdf|pdf]] 4. Harun R. Khan. (2014, Nov 10, 2014). *Indian Foreign Exchange Market: Recent Developments and the Road Ahead - Inaugural address*. 25th Annual Forex Assembly organized by the Forex Association of India (FAI) at Gurgaon. [Link]((https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=919) | [pdf](RBI_Speech_20141110_Indian%20Foreign%20Exchange%20Market-%20Recent%20Developments%20and%20the%20Road%20Ahead_Harun%20R.%20Khan.pdf) 5. Harun R. Khan. (Oct 16, 2012). _Managing currency and interest rate risks – New challenges for banks & corporates_ \[Speech\]. 2nd FT-Yes Bank International Banking Summit, Mumbai. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=744) 6. Dua, P., & Ranjan, R. (Feb 25, 2010). _Exchange rate policy and modelling in India_. Reserve Bank of India. [Link]((https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12252) | [pdf](RBI_Research_DRG_20100225_Exchange%20rate%20policy%20and%20modelling%20in%20India.pdf) 7. Harun R. Khan. (2012, May 10, 2012). Musings on FEDAI, Forex Market and Indian Rupee \[Speech\]. 7th Annual Conference 2012 of FEDAI at Zurich. RBI. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13221) | [pdf](RBI_Speech_20120510_Musings%20on%20FEDAI,%20Forex%20Market%20and%20Indian%20Rupee_RBI.pdf) 8. G. Padmanabhan. (Aug 20, 2012). _Goa to Goa: Changed contours of the Indian forex markets-New realities and priorities_. Reserve Bank of India. Annual Forex Assembly of the Forex Association of India, Goa. 9. Harun R Khan (ex-Deputy Governor of RBI). (May 12, 2014). Regulating Capital Account: Some Thoughts. 9th Annual Conference of the Foreign Exchange Dealers Association of India (FEDAI). Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=14902) 10. Harun R Khan. (Jan 29, 2015). ==Derivatives Dynamics: Looking Back & Looking Ahead==. (Keynote address delivered by Shri Harun R Khan, Deputy Governor, Reserve Bank of India at the Finance Conclave 2015 on ‘Indian Derivatives Markets – Striking a Balance between Risk Protection and Liquidity’ organized by the SP Jain Institute of Management & Research, Mumbai on January 17, 2015). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=937) 11. G. Padmanabhan. (ex-Executive Director, RBI). (2015, April 3). *Musings of a Departing Forex Market Regulator*. Foreign Exchange Dealers Association of India (FEDAI) Conference at Brussels. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=953) | [pdf](RBI_Speech_20150406_Musings%20of%20a%20Departing%20Forex%20Market%20Regulator_G%20Padmanabhan_06042015.pdf) 12. G. Padmanabhan (May 18, 2015). Is India ready for full Capital Account Convertibility? \[Speech\]. MSNM Besant Institute of PG Management Studies, Mangalore. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=956) | [pdf](RBI_Speeches_20150518_Is%20India%20ready%20for%20full%20Capital%20Account%20Convertibility?.pdf) 13. Shri Mahalingam, G. (2015, February 25). *Some Thoughts on Forex Markets in India* \[Speech\]. RBI. India Treasury Summit in Mumbai. 14. H R Khan. (2016, June 21). *Foreign Exchange Market & Cross-border Transactions: Some Random Reflections*. RBI. 11th Annual Conference of the Foreign Exchange Dealers Association of India (FEDAI), Hong Kong. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1008) | [pdf 15. B.P. Kanungo. (2019, Apr 25, 2019). *India’s growing significance in global arena. Is it Sustainable? Are we ready for it?* Reserve Bank of India. FEDAI Annual Conference at Beijing. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1074) 16. RBI. (April 19, 2025) Keynote address at the 24th FIMMDA-PDAI Annual conference - Shri Sanjay Malhotra on April 18, 2025. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1505) | [pdf](RBI_Speeches_20250418_Keynote%20address%20by%20Shri%20Sanjay%20Malhotra,%20Governor,%20Reserve%20Bank%20of%20India%20at%20the%2024th%20FIMMDA-PDAI%20Annual%20conference,%20Bali,%20April%2018,%202025.pdf) ### [[Publications (Data Releases) & Research#Research|Research]] ### [[Publications (Data Releases) & Research#Publications|Publications]] 1. RBI. (June, 1995). *Report of the Expert Group on Foreign Exchange Markets in India (Chairman : Shri O.P. Sodhani).* [Link](https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1041). [pdf](RBI_Group-Committee_19950627_Report%20of%20the%20Expert%20Group%20on%20Foreign%20Exchange%20Markets%20in%20India.pdf) 2. RBI. (Oct 12, 2017). *Discussion paper on foreign exchange trading platform for retail participants*. [pdf](RBI_Discussion%20Paper_20171012_Discussion%20paper%20on%20foreign%20exchange%20trading%20platform%20for%20retail%20participants.pdf) 3. RBI. (Aug 13, 2020). *Onshoring the Offshore*. RBI Bulletin. [pdf](RBI_Monthly_Bulletin_Article_20200813_Onshoring%20the%20Offshore.pdf) ### Others 1. Bank for International Settlements (BIS). (2013). _Market volatility and foreign exchange intervention in EMEs: What has changed?_ (BIS Papers No. 73). [Link](https://www.bis.org/publ/bppdf/bispap73.pdf) | [[BIS_Papers_231001_Market volatility and foreign exchange intervention in EMEs- what has changed?.pdf|pdf]] 2. CCIL. *Quarterly and Annual reports - [CCIL Derivatives market quarterly](https://www.ccilindia.com/daily-market-analysis), [CCIL forex market quarterly](https://www.ccilindia.com/india-forex-market-quarterly)* [^1]: Kanungo, B.P. (2019, April 25). *India’s growing significance in global arena. Is it Sustainable? Are we ready for it?* Reserve Bank of India.FEDAI Annual Conference at Beijing. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1074) [^2]: Khan, H. R. (2016, June 21). *Foreign Exchange Market & Cross-border Transactions: Some Random Reflections* \[Speech\]. RBI. 11th Annual Conference of the Foreign Exchange Dealers Association of India (FEDAI), Hong Kong. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1008) | [pdf](RBI_Speeches_20160621_RBI_Speech_20160611_Foreign%20Exchange%20Market%20&%20Cross-border%20Transactions-%20Some%20Random%20Reflections.pdf) [^3]: G. Padmanabhan. (2012, August 10). *Managing Currency Risk in the New Normal.* \[Speech\]. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13477) | [[RBI_Speech_20120810_Managing Currency Risk in the New Normal_G. Padmanabhan.pdf|pdf]] [^4]: G. Padmanabhan. (2011, September 13). *Forex Market Development – Issues and Challenges – Thoughts of a Returning Forex Market Regulator.* \[Speech\]. RBI Bulletin. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=12508#F0) | [[RBI_Speech_20110913_Forex Market Development – Issues and Challenges – Thoughts of a Returning Forex Market Regulator_G. Padmanabhan.pdf|pdf]] [^5]: RBI. (2022, April 18). *Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications. Monthly Bulletin* [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly_Bulletin_Article_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf) [^6]: RBI. (April 19, 2025) Keynote address at the 24th FIMMDA-PDAI Annual conference - Shri Sanjay Malhotra on April 18, 2025 \[Speech\]. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1505) [^7]: Harun R. Khan (ex-Deputy Governor, RBI). (2014, Nov 10, 2014). *Indian Foreign Exchange Market: Recent Developments and the Road Ahead - Inaugural address*. 25th Annual Forex Assembly organized by the Forex Association of India (FAI) at Gurgaon. [Link]((https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=919) | [pdf](RBI_Speech_20141110_Indian%20Foreign%20Exchange%20Market-%20Recent%20Developments%20and%20the%20Road%20Ahead_Harun%20R.%20Khan.pdf) [^8]: G. Padmanabhan (May 18, 2015). Is India ready for full Capital Account Convertibility? \[Speech\]. MSNM Besant Institute of PG Management Studies, Mangalore. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=956) | [pdf](RBI_Speeches_20150518_Is%20India%20ready%20for%20full%20Capital%20Account%20Convertibility?.pdf)