The Hindu Business Line : Extra cover

Through one of the less publicised announcements in the recent annual Credit Policy statement, the Reserve Bank of India widened the scope of hedging facilities available to Indian importers and exporters. A basic reason for accessing the domestic foreign exchange market is to hedge the foreign exchange risk that is inherent in all cross-border transactions. Traditionally Indian importers and exporters have covered their exchange risks by booking forward exchange contracts with banks. An unstated rule has been that only a genuine commercial transaction involving a foreign exchange outflow (or inflow) could be covered against exchange rate risks. During the period when forex resources were scarce, every aspect of those transactions was strictly monitored right from the time of the booking of the contract, to its utilisation or cancellation. The non-availability of superior hedging tools was also due to the way the rupee's exchange rate was managed before 1993.

For those in international trade, risks were always there, but the tools to minimise them were rudimentary. More recently, as the markets in India acquired depth and volumes and integrated with the global markets, newer hedging instruments such as swaps and options have become available. Yet, in relation to many other countries, including some developing ones, India has lagged in providing facilities to hedge risks. India's trade competitiveness might have suffered when exporters from competing countries have access to the latest risk-minimising techniques. As a constraint on exporters, this should rank on a par with the problems caused by a strengthening rupee. The RBI's relaxation has come at an opportune time and is also justified in the context of parallel moves to remove capital account controls in stages. Not only have the rules been liberalised substantially, but corporates in India can also access a range of hedging products currently available in the advanced countries.

Those engaged in the international trade in select commodities such as aluminium, copper, zinc and aviation turbine fuel could hedge their price risks in the appropriate international exchanges. Small and medium enterprises can now book forward contracts without underlying exposures or past records of imports and exports. Ultimately it is not just a question of providing greater access to hedging products but of educating those in international trade of the benefits of a risk-minimisation strategy. Simultaneously, the Indian financial sector, especially its dominant government-owned institutions, ought to be better equipped to guide its clients.