RBI monetary policy: Fema rules under review to ease scope of hedging

The Reserve Bank of India (RBI) will review its guidelines under the Foreign Exchange Management Act (Fema), to ease the scope for hedging currency risk through derivative contracts. 

The proposed revisions would be issued for public comment by the end of September. 

“It (the exercise) is meant to reduce the administrative and documentation requirements,” said Deputy Governor Viral Acharya.

This was after RBI governor Urjit Patel told journalists the tariff war between America on the one hand and Iran, Russia and China on the other could spill into currency wars. In this background, the central bank wishes to recheck the regulations, to protect the interests of domestic residents and companies. 

At present the regulations on foreign exchange derivative contracts (Fema-25) allow residents of India to enter into a forward contract, interest rate swap, currency swap, coupon swap or foreign currency option or interest rate cap or collar (purchases) or a forward rate agreement contract, with authorised dealers. They may also do so to hedge long-term exposure or forex exposure arising out of trade. 

“We are also hoping to review the mechanisms through which Indian multinationals can hedge their global currency risks and in non-rupee currency pairs, out of their treasury operations within India,” said Acharya.  

State Bank of India Chairman Rajnish Kumar told Business Standard that doing so would help in market development. These contracts are subject to specific regulations and conditions laid down by RBI and Parliament. 

RBI will do the exercise in consultation with the government. It would try to revise guidelines surrounding forex derivative contracts to one, to reduce the administrative burden. And, to allow dynamic hedging. 

This will help ensure the present regulations “are more principle-based, in order to incentivise hedging transactions, while disincentivising those that look like hedging transactions but are not”, Acharya said.