In a bid to encourage more companies to raise money overseas, the RBI has relaxed the mandatory hedging requirement for funds raised through the external commercial borrowing route.
Now, the hedging is required only for 70 per cent of the total funds raised through that route whereas earlier it was 100 per cent.
Reduction in hedging requirement is likely to bring down cost of borrowing from overseas markets as companies would find it less expensive to manage risks associated with exchange rate fluctuations.
The move also comes against the backdrop of rupee witnessing significant depreciation in recent months.
In a notification, the central bank said that companies raising External Commercial Borrowing (ECB) with maturity periods of 3 to 5 years would now require only to provide hedging for 70 per cent of the fund raised as against full exposure earlier.
"On a further review of the extant provisions, it has been decided, in consultation with the Government of India, to reduce the mandatory hedge coverage from 100 per cent to 70 per cent for ECBs raised under Track I of the ECB framework..." the notification, dated November 26, said.
Funds raised through ECBs prior to the relaxation would have to mandatorily roll over their existing hedge only to the extent of 70 per cent of their outstanding ECB exposure.
According to the RBI, Track I refers to medium-term foreign currency-denominated ECB with a minimum average maturity of 3-5 years.
Atul Pandey, Partner at law firm Khaitan & Co, said the change in norms is in continuation with the relaxations introduced by the RBI in the ECB space, including reducing minimum average maturity requirement for such borrowings in the infrastructure sector from 5 to 3 years.
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