RBI Monetary Policy Review: 5 key reforms for rupee, foreign investors, markets

RBI Monetary Policy Review Details:  Much to the surprise of experts, investors and markets, RBI Governor Shaktikanta Das has managed to cut policy repo rate by 25 basis points in the sixth bi-monthly monetary policy. Many believed a status quo in this RBI monetary policy for a host of reason including core inflation, fiscal slippages and more negative data. Now, finally the policy repo rate stands at 6.25%, which was last seen before June, 2018 policy.

Interestingly, this policy was also important for forex investors, rupee, foreign investors and markets. RBI has introduced five reforms. 

Foreign Exchange Derivative facilities for Residents and Non-Residents (Regulation FEMA-25)

A review of the existing facilities for hedging of foreign exchange risk by non-residents and residents was announced in the Statement on Developmental and Regulatory Policies in the Monetary Policy Statements in February 2018 and August 2018, respectively. The said review has been undertaken.

Post review, a draft of the revised directions is being put in the public domain for seeking comments. The draft directions propose to, inter alia, merge the facilities for residents and non-residents into a single unified facility for all users, allow users having valid underlying exposure to hedge flexibly using any instrument of their choice, introduce the ability to hedge anticipated exposure to foreign exchange risk, and simplify the procedures for authorised dealers to offer foreign exchange derivatives. The draft circular on the revised guidelines will be released by the end of February 2019.

Task Force on Offshore Rupee Markets

In view of offshore interest in the Indian Rupee, the Reserve Bank’s policy efforts have been to align incentives for non-residents to gradually move to the domestic market for their hedging requirements. At the same time, there is a need to improve residents’ access to derivatives markets to hedge their currency risks. In order to take forward the process of gradual opening up of the foreign exchange market and also to benefit from a wider range of participants and views, it is proposed to set up a Task Force on Offshore Rupee Markets. 

The Task Force will examine the issues relating to the offshore Rupee markets in depth and recommend appropriate policy measures that also factor in the requirement of ensuring the stability of the external value of the Rupee. Further details about the composition and terms of reference of the Task Force shall be issued separately by the end of February 2019.

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Rationalisation of Interest Rate Derivative Directions

The Reserve Bank has, over time, issued regulations covering various interest rate derivative products such as Interest Rate Swap (IRS), Forward Rate Agreement (FRA), Interest Rate Future (IRF), Interest Rate Option (IRO) and Money Market Future (MMF). The comprehensive guidelines on derivatives was issued in 2007 to clearly define the roles and responsibilities for users and market makers. However, except Overnight Indexed Swaps (OIS), the activity in these derivative markets has been rather thin and limited. 

This, among other reasons, has contributed to a limited use of interest rate derivatives in the Indian financial sector. Some of these regulations have also not been reviewed for almost two decades (IRS/FRA guideline of 1999). It is, therefore, proposed to rationalise interest rate derivative regulations to achieve consistency and ease of access with the eventual objective of fostering a thriving environment for management of interest rate risk in the Indian economy. The draft comprehensive guidelines will be issued for public feedback by the end of March 2019.

Regulation of Financial Benchmarks

It was proposed in the Statement on Developmental and Regulatory Policies, in the Fourth Bi-monthly Monetary Policy Statement dated October 05, 2018, to introduce a regulatory framework for financial benchmarks to improve the governance of the benchmark processes relating to financial products and markets regulated by the Reserve Bank. Draft guidelines are being issued for public consultation.

Investment by Foreign Portfolio Investors (FPI) in Corporate Debt

As a part of the review of the FPI investment in Corporate Debt undertaken in April 2018, it was stipulated that no FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate). FPIs were given exemption from this requirement on their new investments till end-March 2019 to adjust their portfolios.

While the provision was aimed at incentivising FPIs to maintain a portfolio of assets, further market feedback indicates that FPIs have been constrained by this stipulation. In order to encourage a wider spectrum of investors to access the Indian corporate debt market, it is now proposed to withdraw this provision. A circular to this effect will be issued by mid-February, 2019.