Hedging of foreign exchange risk by residents and non-residents: RBI issues final guidance

Pursuant to an announcement made in during February 2019 regarding the review of foreign exchange hedging facilities by non-residents and residents. RBI also issued the draft regulations for public comments proposing to replace the existing directions in Part A – Section I and II of the Master Direction on Risk Management and Interbank Dealing. The draft directions propose to, inter alia

(i) Merge the facilities for residents and non-residents into a single unified facility for all users,

(ii) Allow users having valid exposure to hedge the same using any available instrument,

(iii) Introduce the facility to hedge anticipated exposure,

(iv) Simplify the procedures for authorised dealers to offer foreign exchange derivatives.

According to Statement on Developmental and Regulatory Policies dated 05.12.2019 announced by RBI, the draft regulations have been modified based on the feedback and the recommendations of the Task Force on off shore Rupee market headed by Ms.Usha Thorat. The important changes are as follows: –

Users may undertake over the counter (OTC) currency derivative transactions up to USD 10 million, without the need to evidence underlying exposure.

Banks shall be provided with the discretion, in exceptional circumstances, to pass on net gains on hedge transactions booked on anticipated exposures.

Strengthening the safeguards to ensure, that complex derivatives are sold only to users that are capable of managing the risks.

RBI communiqué said that “The final directions will be issued after notification of the changes to Foreign Exchange Management Act (FEMA) Regulations”.