Simplified Hedging Facility in India

IAS Prelims 2023

Reserve Bank of India unveiled draft guidelines relating to simplified hedging facility for resident entities with foreign currency exposures and non-resident entities with rupee exposures, other than individuals, to enable them to hedge underlying exchange rate risk.

The facility is meant for transactions permitted under the Foreign Exchange Management Act, 1999, of up to $30 million or equivalent.

The products that can be used for hedging could be any over-the-counter (OTC) derivatives and exchange traded currency derivatives (ETCD) permitted under FEMA, 1999, except cost reduction structures and swaps.

The customers with total hedging requirement of up to $30 million at any point in time may enter into permitted forex derivative contracts with any bank authorised to deal (or authorised dealer bank) in foreign exchange up to their requirement. The customers are not required to furnish any documentary evidence to the AD bank for establishing exposure.

Customer will provide the AD bank with a one-time self-declaration signed by the CFO or CFO equivalent, to the effect that the sum total of the outstanding OTC derivative contracts and the outstanding ETCD contracts are backed by underlying currency exposure, either contracted or anticipated.

At the time of booking of hedge contracts, customers may provide information relating to the underlying exposure (no documentary or other evidence is needed), including type of transaction, that is, current/capital account (ECB, FPI, FDI etc.), currency, tenor, and so on.

Hedge contracts can be booked with any AD bank provided the underlying delivery takes place with the same bank. Cancelled contracts under this facility may be freely rebooked with the same bank.