(Updates with details, background, market comments)
MUMBAI, June 20 (Reuters) - India's central bank allowed foreign investors to access the currency futures market for hedging their currency risks while also partially reversing the restrictions put last year on banks proprietary trading in the exchange traded currency futures.
The Reserve Bank of India said foreign portfolio investors can participate in the currency futures market by taking both long or short positions to the extent of $10 million without having to establish any underlying exposure.
"An FPI cannot take a short position beyond USD 10 million at any time and to take a long position beyond USD 10 million in any exchange, it will be required to have an underlying exposure," the central bank said in the release.
For the detailed release, see: (bit.ly/1lETiMQ)
The central bank said the responsibility of ensuring the existence of the underlying exposure shall rest with the foreign investor.
"I don't think this is going to be a game changer in the sense of the word, but you have to see it in a wider ambit of making sure that your markets are becoming more open and more liberal for international investors," said Hitendra Dave, head of global markets at HSBC India.
The Reserve Bank of India also partially reversed the restrictions put on banks' proprietary trading, allowing them to take long or short positions of up to $10 million without establishing any underlying exposure.
In July last year, at the peak of the rupee crisis, the central bank had barred all banks from taking any proprietary positions in the currency futures market.
For banks who want to take positions over $10 million will be required to establish the existence of an underlying, the central bank said in the notification.
For the detailed release, see: (bit.ly/1lb4uzM)
"Banks were the primary market makers in futures, so this will definitely add to the liquidity in the market. The measures taken during the crisis last year will gradually be unwound and we will go back to more normal circumstances," said Ashish Parthasarthy, treasurer at HDFC Bank.
"The RBI has been able to build up its reserves, rupee has been stable for some time now, elections are over, so definitely there is a higher level of confidence in the currency both at the regulatory-end and across market segments," he added. (Reporting by Swati Bhat; Additional reporting by Neha Dasgupta; Editing by Anand Basu)