Reserve Bank of India (RBI) Governor Shaktikanta Das has called upon Indian banks to amplify their participation, both domestically and offshore, while exercising prudence.
The call from Das follows a regulatory crackdown by the RBI on the exchange-traded currency derivatives (ETCDs) market, which has witnessed a drastic decline in trading volumes over the past week.
“We continue to see banking channels being used by certain persons or entities to fund activities on unauthorised FX trading platforms. This warrants enhanced vigilance by the banks,” Das said at the FIMMDA-PDAI Annual Conference in Barcelona on Monday.
What are Exchange-traded currency derivatives (ETCDs)?
Exchange-traded derivatives are financial contracts traded on regulated exchanges. They offer advantages over OTC derivatives, including standardization, liquidity, and reduced default risk. Popular types include futures and options, used for hedging and speculation on various assets like commodities, equities, currencies, and interest rates.
Data from the National Stock Exchange (NSE) revealed a significant plunge in ETCD turnover, standing at Rs 9,064.83 crore on Monday compared to Rs 39,063.69 crore recorded on April 4.
The volumes further dwindled to Rs 73,173.68 crore on April 3 and Rs 1,00,915.86 crore on April 2.
Das pointed, " While domestic banks are increasingly interacting with market-makers on a global scale, they are yet to establish themselves as notable market-makers globally". He stressed the importance of banks conducting thorough due diligence, assessing their risk appetite, and proceeding cautiously in this direction.
Addressing concerns about the declining volumes in the ETCD market, Das said, "The RBI had mandated market players to disclose their underlying exposures in foreign exchange starting April 5, with an extended deadline until May 3, despite this extension, apprehensions among market participants have led to a retreat from the market, evident in the shrinking trading volumes"
Read more: Reserve Bank delays implementation of ETCD directives to May 3 (newsarenaindia.com)
The RBI officials reiterated the central bank's stance on ETCDs during a post-monetary policy press conference.
Deputy Governor Michael Patra emphasized that ETCDs are intended solely for hedging purposes as per Foreign Exchange Management Act (FEMA) regulations and should have an underlying exposure.
Das also cautioned against the usage of unauthorized forex trading platforms, emphasizing the need for enhanced vigilance by banks to prevent illicit activities.
Follow us
