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RBI relaxes hedging rules for currency trading

14 Jan 2014 Evaluate

Providing operational flexibility in external sector, the Reserve Bank of India (RBI) has eased rules for hedging foreign exchange exposures, allowing greater flexibility for cancelling and rebooking forward contracts. With this, domestically-held forward contracts for all current as well as capital account transactions with a residual maturity of one year or less are allowed to be freely cancelled and rebooked. Additionally, as far as the exposure of the FIIs/QFIs/other portfolio investors was concerned, forward contracts booked by these investors once cancelled, could be rebooked only up to the extent of 10 per cent of the value of the contracts cancelled.

As per the existing guidelines, while domestic exporters could cancel and rebook up to 50 percent of the contracts booked in a financial year for hedging their contracted export exposures, importers were are allowed to cancel and rebook up to 25 percent of contracts booked in a financial year. These limits have now been dropped.

Such tight measures were taken by India’s central bank after Indian currency started slumping since late May on fears that the US Federal Reserve will begin tapering its monetary stimulus. The rupee after plunging to record low of 68.85 to the dollar in late August, recovered soon after RBI took slew of measures to bolster forex reserves, including raising $34 billion through two concessional swap facilities.

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