Public sector banks underparticipate in forex derivatives mkt: RBI DG Jain

Public sector banks are underparticipating in the forex derivatives market relative to their balance sheet size, despite their deep relationships with MSMEs and smaller corporates outside major cities, said Rohit Jain, Deputy Governor, Reserve Bank of India (RBI), at the annual day of the Foreign Exchange Dealers’ Association of India (FEDAI) on August 14. He said the client segment was dominated by large corporates, while smaller clients that could benefit from currency risk hedging remained underrepresented.

The speech was published on the RBI website on Thursday.

“Participation remains skewed. Public Sector Banks, which hold deep relationships with MSMEs and smaller corporates outside the metros, underparticipate in forex derivatives relative to their balance sheet size,” Jain said.

He further said that local currencies will play an increasing role in cross-border trade and payments, adding that the success of the Special Rupee Vostro Account (SRVA) framework would depend on commercial viability, greater emphasis on local currency settlement, market-determined rates and confidence in the settlement ecosystem.

He said local currency settlement should not be viewed only as a means of reducing reliance on international currencies, as it can lower transaction costs, reduce currency mismatches and improve settlement efficiency.

“Policy can create the option. It is the Authorised Dealers who will determine whether this happens,” he said.

Jain said the domestic forex market has expanded significantly over the years, with average daily turnover in the spot and derivatives segments doubling to around $80 billion from $41 billion in FY22. Notional outstanding in rupee derivatives has nearly quadrupled since FY21 to around Rs 130 trillion. The latest BIS Triennial Survey estimated combined onshore and offshore daily turnover in the rupee at $185 billion in 2025, up from $119 billion in 2022.

Further, the interbank segment, which accounts for around 70 per cent of onshore volumes, has grown faster than the client segment, indicating deeper bank participation in price discovery. Registrations of forex derivatives with CCIL’s trade repository have also doubled to around 87,000 in 2025 from 43,000 in 2019.

Jain also flagged risks from the build-up of arbitrage positions between the onshore deliverable and offshore non-deliverable forward (NDF) markets in late March and early April. The build-up had prompted calibrated measures relating to net open positions, non-deliverable derivatives offered to customers and related-party transactions, some of which have since been reversed.

As the market integrates further with global liquidity, the focus should be on strengthening risk management, governance and oversight rather than restricting integration, he said.

Jain also highlighted the challenges of a principles-based regulatory framework, saying detailed rules could create rigidity while principles could lead to differences in interpretation.

He said the response should not be a return to prescriptive regulation but stronger institutional judgement, clearer customer standards and greater consistency in interpretation. FEDAI should take the lead in establishing common standards among its members, he said.

The deputy governor also raised concerns over unauthorised entities offering online forex trading outside the regulatory framework. Customers have continued to report cases of cheating and fraud after using platforms that were not authorised to offer forex services.

He urged banks and FEDAI members to sensitise their customers and staff about unauthorised forex trading platforms.

On delegation, Jain said a modern forex system could not function efficiently if routine commercial decisions continued to require prior regulatory approval. The objective should be fewer prior approvals, a simpler rulebook, risk-based reporting and greater reliance on board-approved policies of authorised dealers.

Delegation should reduce the burden on customers rather than shift it from the RBI’s approval process to internal checklists at authorised dealer banks, he said. Principles-based regulation would work only if similar cases received similar treatment across branches and institutions, requiring clear internal policies, trained staff and effective audit processes.

On customer-centric processes, Jain said usage of the FX-Retail facility remained modest despite providing individuals and MSMEs access to competitive interbank pricing since 2019. The Bharat Connect pilot, launched in October 2025, allows customers to transact through banks and apps they already use and is expected to expand to more banks, currency pairs and user categories.

He also highlighted gaps in documentation, delays in cross-border remittances and disclosures on bank websites. Banks need clear policies on documentation, charges, timelines, escalation and grievance redressal, and these should be accessible to customers, he said.