The Reserve Bank of India (RBI) has come out with simplified norms for hedging exchange rate risk on transactions, which allows companies to take exposure of up to $30 million or equivalent, on gross basis. In August 2016, the scheme of simplified hedging facility was first announced by the RBI and the draft scheme was released in April 2017. The facility for resident and non-resident entities (other than individuals) to hedge exchange rate risk on transactions, contracted or anticipated, permissible under Foreign Exchange Management Act (FEMA) will come into effect from January 1, 2018.
In a notification, the RBI said that the scheme aims to simplify the process for hedging exchange rate risk by reducing documentation requirements, avoiding prescriptive stipulations regarding products, purpose and hedging flexibility. It also noted that the facility is also expected to encourage a more dynamic and efficient hedging culture. The products covered will be any Over the Counter (OTC) derivative or Exchange Traded Currency Derivative (ETCD) permitted under FEMA, 1999, except cost reduction structures and swaps.
The central bank further stated that if hedging requirement of the user exceeds the limit in course of time, the designated bank may re-assess and, at its discretion, extend the limit up to 150 percent of the stipulated cap. It also pointed out that banks should have an internal policy regarding the time limit up to which a hedge contract for a given underlying can be rolled-over or rebooked by the user.