Hedging Report

RBI circular dated 15th January 2020 stipulating report to RBI in respect of hedging of commodity price risk and freight risk in overseas markets will now be made in XBRL format instead of excel mode as was stipulated earlier.

https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11789&Mode=0

Please refer to Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 (Notification No. FEMA 25/RB-2000 dated May 3, 2000), as amended from time to time, and Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions, 2018 (issued vide A.P. (DIR Series) Circular No. 19 dated March 12, 2018).

2. Para 10 of the Directions ibid shall be substituted with following:

“10. Report to Reserve Bank - Banks shall submit a quarterly report to the Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India through Extensible Business Reporting Language (XBRL) accessible at https://xbrl.rbi.org.in/orfsxbrl/ in the format provided in Annexure I. In case of no transactions, a “Nil” report shall be submitted by the bank.”

3. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions /approvals, if any, required under any other law.

Hedging of exchange rate risks

RBI has vide its circular dated 1st March, 2019 made operational guidelines for hedging of exchange rate risk by foreign portfolio investors using the VRR route for their debt investments.

Hedging of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary Retention Route

Purpose: To hedge the exposure to exchange rate risk on account of investments made under the Voluntary Retention Route (VRR)

Products: Forwards, options, cost reduction structures and swaps with Rupee as one of the currencies

Operational Guidelines, Terms and Conditions:

i. Authorised dealers may offer derivative contracts using any of the aforementioned products to eligible users under VRR or to its central treasury (of the group and being a group entity). Authorised dealers shall ensure that:

1. The FPI has an exposure to exchange rate risk on account of investments made under VRR.
2. The notional and tenor of the contract does not exceed the value and tenor of the exposure.
3. The same exposure has not been hedged with any other authorised dealer or on the exchange.
4. In cases where the value of the exposure falls below the notional of the derivative, the derivative should be suitably adjusted unless such divergence has occurred on account of change in market value of the exposure, in which case the FPI may, at its discretion, continue with the derivative contract till its original maturity.

ii. Authorised dealers shall allow FPIs to freely cancel and rebook the derivative contracts.

iii. Authorised Dealer shall ensure that all payables incidental to the hedge are met by the FPI out of repatriable funds and/or inward remittance through normal banking channels.

Copy of this said circular can be found here

ECB Policy - Review of Hedging Decision

Gist of RBI notification dated 26th November, 2018 follows:

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11418&Mode=0

Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to paragraphs 2.4.2 and 2.5 of Master Direction No.5 dated January 1, 2016 on “External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers”, as amended from time to time and A. P. (DIR Series) Circular No. 11 dated November 06, 2018, in terms of which certain eligible borrowers raising foreign currency denominated ECBs under Track I, having an average maturity between 3 and 5 years, are mandatorily required to hedge their ECB exposure fully.

2. On a further review of the extant provisions, it has been decided, in consultation with the Government of India, to reduce the mandatory hedge coverage from 100 per cent to 70 per cent for ECBs raised under Track I of the ECB framework by eligible borrowers given at paragraph 2.4.2 (vi) of the aforesaid Master Direction for a maturity period between 3 and 5 years. Further, it is also clarified that ECBs falling within the aforesaid scope but raised prior to the date of this circular will be required to mandatorily roll-over their existing hedge(s) only to the extent of 70 per cent of outstanding ECB exposure.

3. All other provisions of the ECB policy remain unchanged. AD Category - I banks should bring the contents of this circular to the notice of their constituents and customers.

4. The aforesaid Master Direction No. 5 dated January 01, 2016 is being updated to reflect the changes.

5. The directions contained in this circular have been issued under section 10(4) and 11(2) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.