PSBs’ Low Forex Derivative Use Hurts MSMEs: RBI DG Jain

Reserve Bank of India Deputy Governor Rohit Jain recently highlighted the insufficient participation of public sector banks (PSBs) in India’s forex derivatives market. This underrepresentation significantly impacts MSMEs and smaller corporates, who lack adequate access to crucial currency risk hedging tools.

The Participation Gap for Smaller Entities

Jain observed that the client segment of the forex derivatives market is largely dominated by large corporations. This leaves smaller entities, particularly those outside major cities, without sufficient avenues for managing currency risk, despite the extensive reach of PSBs.

Emphasizing Local Currency Settlement

The Deputy Governor stressed the increasing importance of local currencies in cross-border trade and payments. Utilizing local currency settlement can offer several key benefits for businesses engaged in international transactions.

These advantages include reduced transaction costs, minimized currency mismatches, and enhanced overall efficiency in global trade.

Factors for SRVA Framework Success

The success of the Special Rupee Vostro Account (SRVA) framework, according to Jain, hinges on several critical elements. These encompass commercial viability, a heightened focus on local currency settlement mechanisms, market-determined rates, and robust trust in the entire settlement ecosystem.

Forex Market Growth and Emerging Risks

The domestic forex market has experienced substantial expansion, with its average daily turnover doubling. Notional outstanding in rupee derivatives has also seen significant growth since FY21.

The average daily turnover in spot and derivatives segments reached approximately $80 billion, up from $41 billion in FY22. The notional outstanding in rupee derivatives quadrupled to about Rs 130 trillion since FY21.

Jain also addressed risks stemming from arbitrage positions between onshore deliverable and offshore non-deliverable forward (NDF) markets. These positions previously necessitated temporary regulatory adjustments to ensure market stability.

Regulatory Approach and Future Directives

Rather than imposing restrictions, Jain advocated for robust risk management, governance, and oversight as the market integrates globally. He suggested that complexities within a principles-based regulatory framework require stronger institutional judgment.

Clearer customer standards and consistent interpretation are also vital for effective regulation. FEDAI is expected to play a crucial role in establishing common standards across the industry.

Addressing Unauthorized Trading and Operational Efficiency

Concerns were raised regarding unauthorized online forex trading platforms, which frequently lead to fraud. Banks and FEDAI members are urged to educate their customers thoroughly on these risks.

To enhance operational efficiency, Jain called for fewer prior regulatory approvals and a simplified rulebook. He also proposed risk-based reporting and greater reliance on board-approved policies for authorized dealers.

Existing Facilities and Areas for Improvement

The FX-Retail facility, designed for individuals and MSMEs, has seen only modest usage. The Bharat Connect pilot aims to facilitate easier transactions for these segments.

Persistent issues include cumbersome documentation, delays in cross-border remittances, and inadequate disclosures on bank websites. Jain emphasized the critical need for transparent and accessible bank policies to address these challenges effectively.