RBI proposes hedging for 'anticipated exposure' of foreign currency debt

The Reserve Bank of India (RBI) on Friday proposed the introduction of hedging for ‘anticipated exposure’ of the foreign currency debt, while merging the facilities for residents and non-residents into a unified facility for all users.

Hedging can be done using any available instruments. 

An anticipated exposure is having an exchange rate on current and capital account transactions, which are expected to be entered into in the future, the RBI said. 

A year ago, the central bank had increased the limit of buying currency derivatives to up to $100 million or equivalent, without any underlying exposure, from $15 million earlier. However, the RBI had made it clear that the exposure should be utilised only for hedging purpose. 

The draft guidelines put the onus to ensure the contracted derivatives are used for hedging on banks. They must ensure the notional and tenor of the contract does not exceed the value and tenor of the exposure, and the same exposure has not been hedged using any another derivative contract, the RBI said. 

“Where the value of the exposure is not ascertainable with certainty, derivative contracts may be booked on the basis of reasonable estimates,” the draft said. 

The users can freely cancel the contracts, but if there is a net gain on the contracts, banks will have to pass on the benefit to the buyer. Foreign exchange dealers say that banks don’t pass on favourable contracts to smaller firms, thereby hampering these firms’ ability to hedge effectively. 

However, according to central bank rules, such contracts can be extended by banks, if the net worth is Rs 200 crore or equivalent, and the notional amount of the user’s outstanding foreign exchange derivatives exceeded $250 million or equivalent at any point in each of the previous four quarters.