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"The facility is being introduced with a view to simplify the process for hedging exchange rate risk by reducing documentation requirements, avoiding prescriptive stipulations regarding products, purpose and hedging flexibility, and to encourage a more dynamic and efficient hedging culture," said a RBI notification.
The facility for resident and non-resident entities (other than individuals) to hedge exchange rate risk on transactions, contracted or anticipated, permissible under Foreign Exchange Management Act (FEMA) will be effective from January 1, 2018.
The products covered will be any Over the Counter (OTC) derivative or Exchange Traded Currency Derivative (ETCD), the RBI said adding cap on outstanding contracts is "$30 million, or its equivalent, on a gross basis".
"If hedging requirement of the user exceeds the limit in course of time, the designated bank may re-assess and, at its discretion, extend the limit up to 150 per cent of the stipulated cap," the guidelines said.
It further said banks should have an internal policy regarding the time limit up to which a hedge contract for a given underlying can be rolled-over or rebooked by the user.