In order to provide additional hedging products for Non-Residents Indians (NRIs), the Reserve Bank of India (RBI) has allowed NRIs access to the exchange traded currency derivatives (ETCD) market to hedge currency risk arising out of their investments in India under Foreign Exchange Management Act (FEMA), 1999. Under current regulations, NRIs are permitted to hedge their rupee currency risk through over the counter (OTC) transactions with banks authorised to deal in foreign exchange.
As per RBI notification, NRIs may take positions in the currency futures/exchange traded options market to hedge the currency risk on the market value of their permissible (under FEMA, 1999) rupee investments in debt and equity and dividend due and balances held in NRE accounts. RBI added that the access to ETCD will be subject to certain conditions. Also, NRIs will have to designate bank for the purpose of monitoring and reporting their combined positions in the OTC and ETCD segments.
The central bank specified that the responsibility of ensuring the existence of the underlying exposure rests with the NRI. It also said that if the magnitude of exposure through the hedge transactions exceeds the magnitude of underlying exposure, the concerned NRI shall be liable to such penal action as may be taken by Reserve Bank of India under the FEMA.
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