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Informist, Friday, Aug. 22, 2025

 

By Pratiksha

 

NEW DELHI – Reserve Bank of India officials have pushed for the use of various foreign exchange products as a way to deal with uncertainty caused by US trade policies and ongoing geopolitical conflicts, foreign exchange traders said. At the annual assembly of the Forex Association of India held last weekend in Budapest, Hungary, RBI officials said banks are free to use multiple foreign exchange products, including products in the currency derivatives segment, to deal with the current uncertainty and risks, five currency dealers who attended the event said.

 

The RBI likely wants traders to make use of the wide-ranging variety of foreign exchange products to deal efficiently with the volatility emanating from the ongoing global uncertainty, a dealer said. Foreign exchange products such as forward contracts and options are some of the attractive choices that can be used to hedge against currency risk by locking in an exchange rate for a future transaction or setting terms for future currency exchanges.

 

The 34th Forex Association of India's annual conference saw prominent players from the Indian currency market exchanging notes with each other and with RBI officials who attended the event. RBI Executive Director Radha Shyam Ratho, who oversees the financial markets regulation department at the central bank, was a participant in one of the panel discussions held at the conference, dealers said.

 

"Uncertainty in markets was one of the main points of discussion," a dealer at a state-owned bank, who attended the event, said. "They (RBI) said banks should opt for a variety of products to be prepared for anything."

 

Uncertainty has been the name of the trading game, especially since Donald Trump took over as US President in late January. The barrage of tariffs imposed by the US on trading partners and the subsequent ups and downs in the trade talks with several countries has led to significant volatility in the foreign exchange markets across the globe.

 

The rupee has been volatile ever since Trump slapped an additional 25% punitive tariff on India citing its purchase of Russian crude oil, on top of a 25% reciprocal duty. So far in 2025, the rupee has depreciated over 2% against the dollar. 

 

"They (RBI officials) said that we will not force any bank to go with a particular segment. There is a large variety of instruments, and banks are free to access any of those," a dealer at another state-owned bank said.

 

This came after the central bank last year undertook a regulatory cleansing of sorts of India's exchange-traded currency derivative market. The implementation of the RBI's new norms pushed speculators out of the foreign currency derivatives market, long before the Securities and Exchange Board of India trained its guns on the runaway increase in volumes in equity derivatives trading. The new guidelines ensure each deal struck in the currency futures and options market is based on a genuine, documented, underlying exposure. This has effectively pushed out speculators, and as a result trade volumes in currency derivatives have plunged.

 

A dealer said RBI officials are comfortable with the level of India's foreign exchange reserves at present, and said they were not targeting any particular level of exchange reserves. India's foreign exchange reserves were $693.62 billion as of Aug. 8. "The RBI just wants 9-11 months of import cover. There is no particular level in mind," a dealer at another state-owned bank said.

 

India's goods and services imports totalled $920 billion in 2024-25 (Apr-Mar). Using this yardstick, 9-11 months of import cover would mean foreign exchange reserves of $696 billion-$839 billion. This implies the central bank has a lot of headway to add to the reserves.

 

The panel members at the event also discussed plans to position India as a foreign exchange hub in the future. "There were talks at length about the positioning of India as FX hub, but the idea is to get more liquidity and products in the market," a dealer at another state-owned bank said.

 

India has been actively pushing to make the International Financial Services Centre in Gujarat International Finance Tec-City, or GIFT City, a hub for international trade in foreign exchange. A foreign exchange hub serves as a central point for conducting transactions in the global foreign exchange market and is characterised by a high concentration of financial institutions, banks, brokers, and other participants actively engaged in the buying and selling of currencies. Such hubs are also characterised by an environment conducive to free trade of currencies.

 

The GIFT City was created to allow foreign exchange traders to trade the rupee more freely given that the onshore market is a regulated market and the Indian unit is not yet fully convertible. London, New York, Tokyo, and Singapore are the major foreign exchange hubs in the world.    End

 

US$1 = INR 87.48

 

Edited by Tanima Banerjee

 

 

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