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The Reserve Bank of India has made it a tad easier for foreign institutional investors (FIIs) to invest in the domestic equity and debt markets.
FIIs can now approach any Category I dealer bank, authorised to deal in foreign exchange, for hedging their currency risk on the market value of their entire investment in equity and/or debt.
Market players say this measure may be aimed at attracting foreign exchange inflows to smooth the volatility in the rupee-dollar exchange rate movement.
So far, only “designated branches” of AD (Authorised Dealer) Category I banks maintaining accounts of FIIs were allowed to act as market makers for hedging their currency risk.
By hedging currency risks, FIIs can reduce the risks arising from changes in the prices of one currency against another.
In a recent speech, Deputy Governor H.R. Khan said that during the current financial year, after depreciating by more than 10 per cent till June 2012, the rupee started recovering gradually in response to major central banks’ decision to go for further policy easing and the announcements of another round of reform measures by the Government.
The (rupee) appreciation is, however, also associated with some degree of volatility, he added.
According to Securities and Exchange Board of India data, FII investment in the equity and debt markets in the January-July 2012 period jumped 179 per cent to Rs 76,519 crore (Rs 27,432.90 crore in the year ago period).
Meanwhile, the RBI said that ADs will be allowed to sell foreign exchange to a unit in the Domestic Tariff Area (DTA) for making payment in foreign exchange to a unit in the Special Economic Zone (SEZ) for the services rendered by it.
An SEZ is a geographical region that has economic laws that are more free-market-oriented than a country's national laws. DTA is an area outside the SEZ.
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