RBI’s latest anti‑speculation package, unveiled on Sunday, imposes a 20% Foreign Exchange Risk Reserve (FERR) on all forex derivatives sold to importers, while opening a government‑run window for oil companies to purchase dollars. The move is designed to curb speculative flows that have kept the rupee weak, but market participants warn it could tighten liquidity sharply.
Under the FERR, banks must lock up 20% of the transaction value in interest‑free cash at the RBI. Because the central bank has not yet clarified when and how the reserve will be debited, dealers cannot price trades accurately, leading to a potential freeze in interbank quoting.
Ashhish Vaidya, head of treasury at DBS Bank, said the lack of operational clarity makes it risky for desks to offer two‑way prices. He added that cross‑currency swaps — used by firms to hedge external commercial borrowings — are particularly vulnerable, as banks are uncertain whether the 20% reserve applies to the interest portion alone or the entire swap contract.
The uncertainty carries a cost: holding 20% of the swap in idle cash costs banks roughly 6.5%‑7% in lost interest, which they would likely pass on to corporates via steeper swap spreads. Importers who have locked forward contracts to cover upcoming bills could face substantial mark‑to‑market losses if the rupee jumps more than Rs 1 per dollar.
RBI has signalled it will review the rules after the market reaction, but dealers are demanding explicit guidance on FERR application to cross‑currency swaps before they can resume balanced pricing. The next week will see the central bank convene a consultation panel to address these concerns, with a formal clarification expected by early next month.