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Our Bureau

Mumbai, Nov. 12 The Reserve Bank of India on Thursday issued guidelines for Over the Counter foreign exchange derivatives which will help resident individuals, NRIs, FIIs and persons having direct foreign investment in India manage their exchange rate risks.

According to the RBI’s guidelines, the products that can be used for hedging exchange rate exposures include forward foreign exchange contracts, cross currency options (not involving rupee), foreign currency-rupee options and foreign currency-rupee swaps.

RBI has also permitted banks to hedge for the purposes of managing of assets and liabilities, hedging of gold price risk and hedging of currency risk on capital.

Individuals can use these products to hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan) and exchange rate risk arising out of trade transactions.

Individuals can also manage or hedge their foreign exchange exposures arising out of actual or anticipated remittances, both inward and outward, by booking forward contracts, without production of underlying documents, up to a limit of $1,00,000, based on self declaration, said RBI.

While customers can buy put and call options, banks can offer only plain vanilla European options.

Similarly, SMEs can use these products to hedge their direct or indirect exposures to foreign exchange risk. SMEs having direct or indirect exposures to foreign exchange risk are permitted to book, cancel, rebook or roll over forward contracts without production of underlying documents to manage their exposures effectively.

Individuals and SMEs should book the contracts only through banks with which they have a banking relationship or credit facilities. The banks, in turn, should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to the customers, said RBI.

More Stories on : Derivatives Markets | Forex | Regulatory Bodies & Rulings

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