RBI Permits Standalone Primary Dealers to Participate in Non-Deliverable Rupee Derivative Markets [Read Circular]

Under existing rules, only Authorised Dealer Category-I (AD Cat-I) banks with an International Financial Services Centre (IFSC) Banking Unit (IBU) were allowed to transact in non-deliverable derivative contracts (NDDCs) involving the Rupee.

NDDCs are financial contracts (like forwards, options, swaps) where settlement happens in a freely convertible foreign currency (such as USD) rather than in Rupees, commonly used in offshore markets. These instruments are important for hedging against Rupee volatility, especially for entities that cannot directly access onshore markets.

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Non-deliverable derivative contracts are financial instruments, such as forwards, swaps, and options, where the settlement takes place in a freely convertible foreign currency like the US dollar instead of Indian Rupees. These contracts are widely used by residents and non-residents to hedge against Rupee exchange rate volatility.

After review, RBI has expanded eligibility:

• Standalone Primary Dealers (SPDs), when authorised as Authorised Dealer Category-III (AD Cat-III), can now also transact in Rupee NDDCs.
• They can offer these transactions to both residents and non-residents.

Key Amendments in the Master Direction

The RBI has amended its Master Direction – Risk Management and Inter-Bank Dealings (2016) to reflect this:

1. SPDs (AD Cat-III) are explicitly added wherever AD Cat-I banks with IBUs were mentioned.
2. This means SPDs can now participate alongside AD Cat-I banks in NDDC markets.

The change is also expected to reduce the over-reliance on offshore markets for Rupee hedging, as more activity can now take place with regulated Indian entities

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