RBI asks banks to set aside capital, provisions for unhedged FX exposure

Move comes amid sharp depreciation in rupee; says losses incurred by entities with such exposure could affect health of banking system

The Reserve Bank of India (RBI) on Tuesday tweaked guidelines for banks on incremental capital and provisioning requirements in relation to unhedged foreign currency exposures, amid the weakness in the rupee vis-a-vis the US dollar.

The rupee has depreciated about 10 per cent against the US dollar thus far in 2022, and as a result there has been greater scrutiny of firms’ unhedged exposure through borrowings in foreign currencies.

“Entities which do not hedge their foreign currency exposures can incur significant losses during the period of heightened volatility in foreign exchange rates. These losses may reduce their capacity to service the loans