SEBI caps unhedged currency derivative positions at $5 million

The Securities and Exchange Board of India (SEBI) has revised the limits for taking positions in rupee-linked currency derivatives without establishing underlying exposure. The regulator has capped the aggregate outstanding notional value at $5 million across all recognised stock exchanges and currency pairs.

Domestic clients and foreign portfolio investors (FPIs) can take long or short positions of up to $5 million without demonstrating underlying exposure. The limit applies collectively across all currency pairs involving the Indian rupee. It cannot be used separately for different exchanges or currency pairs.

The revision follows the Reserve Bank of India's (RBI) decision on 10 October 2026 to reduce the threshold from $100 million to $5 million. The changes form part of the central bank's revised risk management and inter-bank dealing framework.

SEBI has also specified conditions for positions exceeding the $5 million limit. FPIs must ensure that their aggregate short positions across all exchanges in foreign currency-INR contracts do not exceed this threshold.

To take long positions above $5 million, FPIs must establish underlying exposure in Indian debt or equity securities. This includes units of equity and debt mutual funds.

Domestic clients can take positions above $5 million. However, they must comply with the conditions prescribed under the RBI's Master Direction on Risk Management and Inter-Bank Dealings and its circular dated 10 October 2026.

The RBI's revised framework also restricts the cancellation and rebooking of INR derivative contracts. Authorised dealers cannot permit users to rebook cancelled contracts. However, contract rollovers on maturity remain permitted, subject to regulatory conditions.

The RBI has also tightened documentation requirements for hedging contracted exposures. Users must provide an undertaking confirming that the same exposure has not been hedged through another authorised dealer. If multiple dealers are involved, users must disclose the amounts booked with each dealer. Supporting documents must be retained for at least two years.

SEBI has directed stock exchanges and clearing corporations to implement the revised rules. They must amend relevant bye-laws and regulations, inform brokers and clearing members, and report implementation status to the regulator.

Other provisions of SEBI's Master Circular dated 30 December 2024 will remain unchanged, except where modified by the latest circular.

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