SEBI relaxes rupee derivatives norms for domestic investors and FPIs; sets $5 million limit

The Securities and Exchange Board of India (SEBI) has revised rules for currency derivatives, allowing domestic investors and foreign portfolio investors (FPIs) to take positions of up to $5 million in rupee-linked contracts without having to establish underlying foreign currency exposure.

In a circular issued on Thursday, November 5, the market regulator said domestic clients and FPIs can take long or short positions in currency derivatives involving the Indian rupee within a combined limit of $5 million in notional value.

The limit will apply to outstanding positions across all rupee-involving currency pairs and recognised stock exchanges at any point. Investors, therefore, cannot claim a separate $5 million limit for each currency pair or exchange.

What are the rules for FPIs?

SEBI has specified that FPIs cannot have aggregate short positions exceeding $5 million across all stock exchanges in foreign currency-rupee contracts without underlying exposure.

However, FPIs seeking to take long positions beyond the $5 million limit must have underlying exposure in Indian debt or equity securities. Investments in equity and debt mutual funds will also qualify as underlying exposure.

What about domestic investors?

Domestic investors can take positions beyond the $5 million threshold, subject to the conditions prescribed under the Reserve Bank of India's (RBI) Master Direction on Risk Management and Inter-Bank Dealings, as amended.

The revised provisions align with changes introduced by the RBI in October 2026 concerning foreign exchange derivatives involving the Indian rupee.

What has SEBI directed stock exchanges to do?

SEBI has directed recognised stock exchanges and clearing corporations to make the necessary system and regulatory changes to implement the revised framework.

They must also communicate the changes to stock brokers and clearing members, publish the relevant provisions on their websites and report the implementation status to SEBI.