The Reserve Bank on Tuesday permitted international banking units (IBUs) in GIFT City in Gujarat to settle non-deliverable foreign exchange derivative contracts (NDDCs) in Indian rupee.
So far, derivatives are cash-settled in foreign currency.
As per the notification, Authorised Dealer (AD) Category-I banks operating IBUs can offer NDDCs involving the Indian rupee to resident non-retail users for hedging. Such transactions shall be cash settled in Indian rupee.
"The flexibility of cash settlement of NDDCs transactions between two AD Cat-I banks, and between an AD Cat-I bank and a person resident outside India in INR or any foreign currency," it said.
This will help develop the onshore rupee NDDC market and provide residents with the flexibility to efficiently design their hedging programmes, it said.
The RBI's decision to allow banks to offer Indian residents rupee NDDCs will help eliminate arbitrage between domestic and overseas markets.
Banks in India, which operate International Financial Services Centre (IFSC) Banking Units (IBUs), were permitted to transact in rupee NDDCs with non-residents and with each other with effect from June 1, 2020.
To develop the onshore rupee NDDC and to provide residents with the flexibility to efficiently design their hedging programmes, it has been decided to permit banks with IBUs to offer rupee NDDCs to resident users in the onshore market, the RBI said in a statement on Developmental and Regulatory Policies released in April.
These banks will have the flexibility of settling their NDDC transactions with non-residents and with each other in foreign currency or Indian rupee while transactions with residents will be mandatorily settled in rupee, it had said.