RBI Reiterates Hedging Policy For External Borrowings

The Reserve Bank of India (RBI) on Monday reiterated its foreign exchange hedging policy for external commercial borrowings (ECBs) to ensure uniformity in hedging practices.

The RBI clarified that borrowers should hedge both principal and coupon payments through financial hedges, where mandated. The financial hedge should start from the day the liability is created in the books of the borrower.

“A minimum tenor of one year of financial hedge would be required with periodic rollover duly ensuring that the exposure on account of ECB is not unhedged at any point...” said the central bank.

The RBI also noted that a natural hedge will be considered only to offset cash flows or revenues in the same currency, net of all other projected outflows. A natural hedge is one where assets in a certain currency balance out liabilities in that currency.

“ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures, where revenues are indexed to foreign currency will not be considered as natural hedge,” said the RBI.

Corporates are cautioned from time to time to ensure that their foreign currency exposure is adequately hedged. This is important to ensure that volatility in the currency markets does not hit corporate balancesheets and, in turn, the banking sector.