Banks should have board-approved policy on hedging

Reserve Bank of India (RBI) governor D Subbarao on Tuesday said banks should have a board-approved policy on hedging of foreign exchange exposure, the guidelines for which would be issued soon.

“Banks told us (currently) hedging is decided on a case-to-case basis, depending on the loan deal. But our view is banks should have their own policy on hedging,” Subbarao said. “In about ten days, we will issue guidelines on banks having to go to their boards for a well-considered policy on hedging by their corporate borrowers,” he said.

Typically, banks refrain from giving foreign currency loans if the borrower does not have a natural hedge. But there are no norms that make it compulsory for borrowers to cover their risk fully. “We have not mandated hedging because we want banks to take the decision,” said Subbarao. RBI asked banks to report the hedging status on all loans above $25 million. “It is for reporting purposes...it is under process,” Subbarao said, after announcing the third-quarter review of monetary and credit policy 2011-12. The central bank announced a 50-basis point cut in the cash reserve ratio, while keeping policy rates unchanged.

RBI said global growth prospects for 2012 had deteriorated in an environment of increasing concerns over the sovereign debt crisis in the euro area, amid limited monetary and fiscal policy space. It said it was monitoring the situation in the debt-ridden euro zone. Subbarao said India’s exposure to euro zone banks stood at about $60 billion.

Rising risk aversion in the backdrop of global uncertainty had an impact on the rupee-dollar exchange rate, as it touched a new level of 54.30 in December. Following this, RBI had introduced a slew of measures to curtail volatility by curbing speculative trading. The RBI governor said the measures may not be temporary. “It is not even clear that it is a temporary measure. The administrative measures that we took, don’t be under the impression that they are temporary measures,” he said.

These measures included imposing a cap on the overnight open exposures of banks. RBI had also disallowed cancelling and rebooking of forward contracts.