To improve the risk mitigating environment in the country, the Reserve Bank today allowed overseas investors to hedge their currency exposure.
In its first bi-monthly policy, the RBI, in order to enhance the hedging facilities for foreign investors in debt instruments, proposed to allow them to hedge the coupon receipts falling due during the next 12 months.
“This is determined by improving the hedging environment for foreign investors in India. It is not necessarily to combat the NDF (non-deliverable forward) market but primarily to improve the (hedging) environment in the country,” RBI Governor Raghuram Rajan told reporters at the customary post policy meeting with the media.
The central bank also said it is in final discussion with SEBI to finalise the modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges.
The RBI also proposed to allow all resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to $2,50,000 on declaration, subject to certain conditions.
“The Reserve Bank will continue to work to ease entry while reducing risk to foreign investors from the volatility of flows,” it said in the policy.
Rajan said the Reserve Bank’s effort is to avoid excess volatility in the forex market and not to achieve a level for the rupee.
“I don’t think we are trying to establish any level (of rupee) in the market. What we do is try and attempt to keep the exchange rate from becoming overly volatile and it will continue to be our policy,” Rajan said.
He said the Reserve Bank has taken into account expansion in foreign currency assets while determining the overall liquidity expansion in the market.