Reserve Bank of India eases hedging rules to aid volumes

MUMBAI: The Reserve Bank of India liberalised hedging norms to boost trading volumes in the over-the-counter market. The RBI had imposed these restrictions to curb speculation in the foreign exchange market after the rupee weakened by over 18% between August and December 2011.

Exporters can now credit 100% of their foreign exchange earnings to the EEFC (exchange earners' foreign currency account) without having to convert 50% of it in rupee terms.

Exchange earners' foreign currency account (EEFC) is an account maintained in foreign currency with an authorised dealer or bank. It is a facility provided to the foreign exchange earners, including exporters, to credit 100% of their foreign exchange earnings to the account. But exporters will have to convert the total accrual by the end of the month into rupee terms.

According to market experts, this measure will help exporters to hedge their exposures with banks, which might give a boost to the rupee which has weakened by 9% against the dollar in the first quarter of financial year 2013.

"Exporters might sell (dollars), but it stands to have a limited impact, since the demand for dollars is huge, and one-off inflows have not helped the rupee correct much in the recent past," said Anil Bhansali, vice-president, Mecklai Financial.

The RBI has also now allowed exporters to book and cancel forwards contracts to about 25% of their total contracts booked for hedging exposures. In an RBI circular issued in July, the bank had clearly said that forwards contracts booked by residents, irrespective of type and tenor of the underlying exposure, once cancelled could not be rebooked.

Exporters and importers get into forwards contract, whereby they agree to sell or buy a currency at a pre-determined exchange rate on a given day. "All the steps (taken in December) seem to help in reducing volatility," RBI deputy governor, Subir Gokarn said in his interview to ET.

"And having reached that situation, we felt that there was some room to give our participants a little more flexibility in their management of their exposures, their genuine hedging requirements and that has motivated the actions that we took today."

RBI has also freed the net overnight open positions (NOOP) of overseas branches of banks from the limits imposed earlier. Net open positions are transactions which have not been squared off on an overnight basis.

"This liberalises the NOOP a bit more," said Ashish Vaidya, ED, trading, UBS. "These moves are directed towards undoing the restrictions the RBI had put in place in December. Trading volumes in the OTC market will certainly increase," he added.