There is a pressing need on the part of corporates to improve their risk management practices in view of imminent tightening of US interest rate cycles, according to a senior Reserve Bank of India official.
This is to preclude the possibility of huge losses in the event of unexpected developments, said G Mahalingam, Executive Director, RBI, at a treasury summit.
“In this context, hedging of forex exposure by corporates assumes paramount significance. While large treasury profits are alluring, it should not become an all-consuming passion exposing the corporates to unacceptable risks,” he said. Mahalingam observed that every corporate needs to formulate a well-deliberated hedging policy and ensure strict adherence to it.
The RBI has been sensitising the corporate and the banking system about the need for hedging and has devised appropriate regulations in the recent period but it is more important that corporates take these exhortations seriously and act accordingly, he added. “Apparently, there exists some misconception that the RBI will always lean against the wind in the event of sharp depreciation of the rupee but this may not always be true. Banks also need to diligently factor in these risks while extending credit to corporates and hedging by corporates needs to be encouraged further to reduce risks,” said Mahalingam.
He said recent experiences, especially after the global financial crisis, suggest that large reserves in the case of emerging market economies like India with sustained current account deficit act as a buffer and help in weathering the impact of sudden stops/reversals in capital flows, especially during crisis periods.
India’s forex reserves increased significantly in 2014-15 so far and stood at an all-time high of around $333 billion on February 13, 2015.