CB stipulates when banks can enter into forward forex agreements

As the three-month suspension on entering into forward rate agreements on foreign currency expired, the Central Bank has issued fresh guidelines to licensed commercial banks specifying the instances they could enter into such agreements, until otherwise further instructions are issued. 

Commercial banks are still prevented from entering into forward rate agreements on foreign exchange, “with value date beyond spot date,” except for specified instances as set out in the new directions issued. 

The Central Bank on January 25 suspended banks from buying or selling foreign exchange at forward rate—the process known as ‘forward rate agreements’ for three months, which lapsed on April 25. 

Such agreements, which are part of multiple derivative instruments available, are used by parties that are often exposed to foreign exchange volatility—such as exporters and importers—to minimise possible losses from movements in foreign exchange rate.

With a slew of other measures introduced to contain excessive volatility in the currency, the purpose of the suspension was to prevent people and parties from excessively speculating on the rupee, which was building pressure on the currency from mid  January. 

Hence, according to fresh instructions issued, banks are allowed to forward purchase foreign exchange from their customers including exporters. 

Further, such agreements are also allowed when the need arises to facilitate swap arrangements on foreign exchange borrowings by licensed commercial banks, specialised banks and other companies to hedge their foreign exchange exposures arising from such borrowings approved by the Central Bank. 

Further, parties can also enter into a forward rate agreement with commercial banks when the need arises to amend or extend the value date of existing forward/swap contracts of clients at historical rates based on express requests form clients, but after verifying the bona fide of the transactions. 

The other instances where the forward rate agreements on foreign exchange are allowed are when entering into inter-bank forward and swap transactions with single counter-party i.e. only between two banks, and when entering into forward cross currency transactions.