RBI Tightens Guardrails on Forex Guarantees

The Reserve Bank of India proposed fresh limits around guarantees linked to foreign exchange transactions, drawing a clearer red line for individuals acting as surety or creditor in current- and capital-account exposures without explicit central bank permission. The draft is designed to reduce opaque cross-border risk transfer that can snowball during stress events, and to make supervisory follow-up more traceable across counterparties. In practical terms, treasurers should expect tighter onboarding for any structure resembling back-to-back guarantees, and legal teams will likely revisit existing inter-company comfort letters where contingent exposure has not been tested against a formal approval threshold.

The timing intersects with a credit cycle in which corporate India is borrowing more offshore to arbitrage spreads, while high-growth mid-caps explore supplier finance and export receivable insurance. By narrowing the channels through which contingent liabilities can be created, the RBI is nudging firms toward cleaner, on-balance-sheet funding or well-documented external commercial borrowings. Banks, for their part, will recalibrate internal ratings to incorporate the new treatment of guarantees, which can alter pricing for letters of credit and performance bank guarantees issued in support of cross-border contracts.

Markets will view the draft as a risk management upgrade rather than a growth brake. Reduced ambiguity around who can underwrite which obligation tends to lower tail-risk premia in currency markets. Over time, clarity on contingent liabilities can also support sovereign-level perceptions of external vulnerability, a theme closely tracked by global bond investors as India primes for broader index inclusion and deeper overseas participation in domestic government securities.