RBI to aid exporters, importers in managing FX risks better

Central bank provided more leeway to exporters, importers in cancelling and rebooking forward exchange contracts

The Reserve Bank of India's (RBI) measures to aid operational ease and expand the depth of foreign exchange (FX) market is likely to help importers and exporters in managing their FX risks better.

"The measures will provide room for maneuverability and corporate houses can now sharpen their risk management skills further. There will be a temptation to cancel and re-book forward contracts among importers and exporters. This will help in reducing the volatility in FX rates to a certain extent," Param Sarma, director and chief executive of NSP Treasury Risk Management Services, said.

In his first day in office, the new RBI governor Raghuram Rajan announced a slew of measures to arrest rupee depreciation, attract foreign capital and liberalise the financial sector.

The central bank provided more leeway to exporters and importers in cancelling and rebooking forward exchange contracts. Exporters will now be permitted to rebook cancelled forward exchange contracts to the extent of 50 % of the value of cancelled contracts. Earlier it was capped at 25 %.

The facility has been extended to importers also to the extent of 25%. Previously importers were not allowed to rebook cancelled forward exchange contracts. Rajan also promised that the restrictions will be relaxed further as the situation improves.

In other words, before the measures were announced, if an exporter hedged a particular consignment for delivery in October, he would not be able to rebook the order for more than 25 % if he fails to deliver within the stipulated time to the client.

But now he will be able to rebook 50 % of the cancelled order and trim a part of his loss. Similarly, for importers, they can now rebook at least 25 % of the cancelled order which was not permissible earlier.

"We cannot create depth by banning position taking, or mandating trading based only on well-defined 'legitimate' needs. Money is fungible so such bans get subverted, but at some level, all investment is an act of faith and of risk taking. Better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores," Rajan said in his maiden speech as RBI governor.

"Together with the government and regulators such as Sebi, we will steadily but surely liberalise our markets, as well as restrictions on investment and position taking," he added

Bankers said the steps will allow importers and exporters hedge their FX risks better. "It will certainly help both importers and exporters as they will now have some operational flexibility while taking a FX hedge," said a banker with a private sector bank.

Some of the market participants felt the measures will be beneficial only in the long run.

"In the long run, this is going to be immensely helpful for both exporters as well as the importers as this will help in reduction of losses faced by us due to hedging. But currently no one is resorting to hedging or going for forward bookings due to the extreme rupee volatility. So this will not make much of a difference immediately. Nevertheless, it does give out a positive message to the banks," Rafeeque Ahmed, a Chennai-based leather exporter and president of Federation of Indian Export Organisations (FIEO), said.