Banks seek RBI relief, clarity on India's latest rupee-defence measures, sources say By Jaspreet Kalra, Nimesh Vora and Dharamraj Dhutia MUMBAI, Oct 12 - Banks have urged the Reserve Bank of India to ease one of the key measures the regulator announced over the weekend to support the rupee and scrap the threshold above which the rule comes into effect, four people familiar with the discussions said.

Lenders have approached the central bank through a forex industry body, seeking the removal of a mandate that banks make a 20% cash deposit with the RBI for FX derivatives used to hedge current-account exposures, the people said. The people declined to be named as they are not authorised to speak to the media.

The RBI's measures, announced on Saturday, are aimed at curbing corporate demand for forward dollars that have piled pressure on the rupee, which has been falling due to steep oil prices and capital outflows.

The rupee jumped 1% on Monday in reaction to the regulatory moves, which also included redirecting oil companies' dollar demand away from the spot market.

Banks have proposed the RBI replace the 20% deposit mandate with a flat charge on companies hedging current-account exposures through forward dollar purchases, or other derivatives, arguing the change would raise hedging costs without tying up rupee liquidity in banks’ treasury operations, the people said.

Citi economists have estimated that about 600 billion rupees to 700 billion rupees ($6.27 billion to $7.31 billion) of liquidity could be absorbed even if importer hedging reduces substantially.

Banks will be passing on the cost to clients, a banker who attended a meeting of the Foreign Exchange Dealers' Association of India on Sunday said. "Instead of that (the 20% reserve) just directly imposing a higher charge, say in paisa terms, removes a lot of friction," the banker said.

Banks have also sought the removal of the $2 million threshold above which the deposit requirement comes into effect, warning it could encourage companies to split hedges into smaller lots.

Bankers said it would be difficult to keep track of such practices, since they may not be able to question clients booking multiple smaller transactions.

Lenders have also sought clarity on whether the 20% deposit requirement applies to hedges against interest payments on foreign-currency loans.

While the rules do not cover hedging related to principal repayments for overseas loans, lenders want clarity on whether interest payments will also be exempted. The RBI did not immediately respond to an email seeking comment.