At the time of rollover of the existing hedges, the mandatory limit would be reduced to 70 per cent automatically, the RBI said in a notification on its website.
The hedging reduction would help Indian companies borrow funds relatively cheaply as hedging cost added up substantially to the final cost.
For example, the hedging cost for one-year borrowings would be around 5 per cent, which adds to the interest rate. If 70 per cent of the loan is hedged, a substantial portion of the requirement is saved.
“The RBI is listening to the government, which wanted cost of funds for corporates to come down. This move will certainly help bring down the cost from overseas sources for India companies,” said the CFO of a large company asking not to be quoted.
This will particularly help companies with a substantial portion of natural hedging, or those that earn in foreign currency.
The external hedging requirement could become almost zero or thereabout for some of these firms, said a rating agency executive.
Besides, demand for the forward dollars also gets reduced to some extent and may help rupee strengthen in that segment. Hedging is essentially contracting forward dollars.
The RBI wanted companies to be fully hedged as unhedged dollar exposures were a risk for banks’ lending to these companies. The RBI had also told banks to make the loans costly for companies that are not fully hedged.
Hence, scaling back the hedging requirement may look surprising, but it is not unusual.
Globally, hedging requirement is around 50 per cent for most emerging market countries that are exposed to global currency swings.