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Banks have sought operational guidelines on maintaining the newly introduced foreign exchange risk reserve (FERR) with the Reserve Bank of India (RBI).

The FERR has been introduced as part of RBI’s measures to curb speculation and contain volatility in the forex market.

In respect of all foreign exchange derivative contracts involving Indian rupee (INR) that are for notional value exceeding $2 million equivalent, authorised dealers will be required to maintain with RBI an FERR in cash, equal to 20 per cent of the INR equivalent of the notional amount of each transaction, per the central bank.

“The FERR requirement is a first-of-its-kind measure. While banks are familiar with managing the cash reserve ratio (CRR), the FERR requirement introduces a different set of operational challenges,” said a forex dealer with a public sector bank.

Banks are seeking clarity on aspects such as how these costs should be passed on to importer and exporter clients; the methodology for calculating the cost; the operational procedures for setting aside and remitting the required reserves to the RBI; and whether the cost of the reserve requirement should be uniform across banks or determined independently by each bank.

For example, for every $3 million derivative contract (approximately ₹28.73 crore), a bank would need to park about ₹5.75 crore with the RBI. Banks would not earn any interest on these funds, creating an additional cost that they may seek to recover from clients. However, the absence of clear guidelines on cost calculation and recovery remains a key concern.

Meanwhile, the RBI has sought feedback from four leading banks on the impact of the measures announced on Saturday.

The central bank announced restrictions on rebooking of cancelled foreign exchange derivative contracts; reduced the threshold for undertaking foreign exchange derivative transactions without establishing underlying exposure from $100 million to $5 million; introduced FERR for banks; and prescribed additional documentation for verification of underlying exposures.

The RBI alsoopened a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) — Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd.

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