RBI to ease forex hedging norms for ex-im trade

24 May 2013

The Reserve Bank of India (RBI) has decided to increase the facility of rebooking of cancelled contracts to 50 per cent of their total hedged exposure from the present limit of 25 per cent, for both exporters and importers.

The decision follows the recommendations of a committee which suggested self certification for short-term quarterly forward contracts since the hedging process in the OTC market involved tedious documentation, RBI executive director G Padmanabhan told a meeting of the Foreign Exchange Dealers' Association of India in Singapore today.

The committee was of the view that the quarterly duration for declaration of forward contracts booked by the exporter and certified by statutory auditor may be replaced with a quarterly self certified declaration by the exporter and an annual statutory auditor certified declaration.

This recommendation has also been accepted for implementation, he said, adding that the relaxed norms are expected to cheer the market.

Further, the RBI also is in the process of simplifying the documentation for booking of forward contracts up to $200,000, Padmanabhan said, adding that these facilitations have nothing to do with RBI's perception as in the case of net open position limits of banks.

He said the RBI would continue to manage the exchange rates as hitherto, targeting on curbing excessive volatility rather than any specific levels.

The Indian rupee dropped to an 8-1/2 month low of 56.01 to the dollar on Thursday. It was trading at 55.52 compared to its previous close of 55.59/60.

Padmanabhan also said the RBI has been constrained to increase the risk weight and provisioning requirements on banks' exposure to corporates' unhedged forex positions and that there was an urgent need to hedge forex exposures in the corporate balance sheets.

Though hedging is not mandatory for a corporate, however, keeping in view the potential adverse impact of large unhedged exposures on financing banks' balance sheets and the financial system, especially in times of excessive volatility, banks have been advised to evaluate the risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium while extending fund based and non-fund based credit facilities to them, he said.
 
RBI, he said, has also advised banks to consider stipulating a limit on unhedged forex position of corporates on the basis of policy approved by the boards of the banks. The measures have to be strengthened by requiring the corporates to put in place a risk management policy for their unhedged forex exposures, he said, adding that this is yet to be achieved.

''We have observed that despite our repeated efforts to sensitise both banks and corporates on the matter, adequate measures have not been put in place. It was therefore decided to increase the risk weights and provisioning requirements on banks' exposures to corporates on account of the corporates' unhedged forex exposure positions,'' he said.