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RBI’s new hedging guidelines – Impacts for Indian companies

Written by QuantArt Market

Forex Hedging | 08 min Read

Can INR move to 70.00

Let us understand the guidelines first.
New Guidelines are applicable from Sept 1st. does away with most of the restrictions on operational aspects and allows product flexibility for certain companies.

1.Users are classified as Retail and non-retail.

1) Non-retail users:

A. Companies with a minimum net worth of Rs 500 crores.

B. Exim Bank, National Bank of Agriculture and Rural Development (NABARD), National Housing Bank (NHB), and Small Industries Development Bank of India (SIDBI).

C. person resident outside India other than individuals.

2) Retail user: Any user who is not eligible to be classified as a non-retail user shall be classified as a retail user.

Any user who is otherwise eligible to be classified as a non-retail user shall have the option to get classified as a retail user.

2.Permissible products for Retail users –

Forwards, purchase of call and put options (Only European options), purchase of call and put spreads, swaps.
All other products are not permissible to retail users, like a seagull, range forwards, par forwards, rupee to FC swaps, any exotic products.

3.Permissible products for Non-Retail users –

Any derivative contract, including covered options, exotics, provided that the potential loss from the derivative transaction to the user, in any scenario, does not exceed the loss that the user would face if he had left the position unhedged.

4.Exposure classification –

Contracted exposure –

  • As per the previous guidelines freely cancellation and rebooking are allowed
  • Documents to be published within 15 days in either physical or electronic form including but not limited to email.

Anticipated exposure –

  • Free cancellation and rebooking permitted
  • Gain on cancellation will be passed upon showing the underlying cash flow.
  • Part gain can be passed on upon demonstrating the cash flow as well.
  • All gains/losses netted at each contract level and settled when delivered or when the proof is shown
  • No need for a statutory auditors’ certificate to establish exposure, company declaration is enough.

Special 10 million facility –

  • Not to be taken as a separate facility
  • Until O/S hedge amount in a financial year does not exceed, no proof of underlying is required
  • When the outstanding hedges cross 10 million, the underlying documents need to be shown for entire outstanding contracts
  • This 10 million limit is a limit across all banks

Contracted and anticipated exposures are not interchangeable

Positives:

  • Wider product flexibility for non-retail users as exotics are allowed with all other existing products.
  • Exotics with a rider of the condition that the loss on the hedge +underlying does not exceed the loss on an unhedged position. This condition will keep a much-needed check on the risk of a runaway loss.
  • Smaller users can do the call spreads and put spreads. This will allow the users to reduce the hedge cost burden with decent protection. Earlier less than 200 crores of net worth/non-listed companies were not allowed to do these spreads.
    Example: An importer with a very thin business margin can take a call spread of 73 to 74.75 by paying a premium of 75 paise for January end instead of paying 87 paise for a forward. Here he will enjoy the possible appreciation benefit with a lower cost of hedging along with decent protection.
  • Lesser statutory requirements in the form of self-declaration instead of a statutory auditor’s certificate is a welcome change for small companies.
  • Anticipated exposures and USD 10 million facilities are good steps for the new companies to hedge their future exposure where the bid is won but LC has not been opened.

Scope of improvement:

  • The companies below a net worth of 500 crores cannot do Range forwards and seagull type of structures. These products are very useful in saving costs or dealing with uncertainties. Earlier companies with 200 cr plus networth could do such structures but now they also cannot unless net worth is INR 500 crores. Ideally, these products should be allowed to all companies subject to suitability and appropriateness.
  • Range forward is a very conservative product where the worst case is defined with a limited benefit which is also well defined. For example, an exporter right now could be confused about whether to hedge or to wait for better levels. Range forward can ensure that 73.00 is protected whereas if INR depreciates, the exporter can get benefit till 76.00 or 77.00. The levels are dependent on tenor.
  • Seagull is also an effective product where protection is limited and on the benefit side, it returns better than the forwards. This is very useful for importers. For example, an importer can protect themselves from 73.50 to 75.50 and can benefit from INR appreciation to 72.50.
  • Rupee to foreign currency swap could have been continued as a permissible product for the exporters on the ground of natural hedge. It is a very good instrument to reduce the interest cost burden on loans.

We believe these products should be allowed for retail users as well.

To discuss further you can call us at +91 79803 97803 or email: [email protected]
QuantArt is India’s best foreign exchange advisory company Our clients include Tata Group, AV Birla Group, Vedanta Group, Reliance group, Top Banks, NBFCs, MSMEs, and MNCs. Our senior advisors are specialists in treasury management and ex-bankers having worked with JPMorgan, HSBC, Goldman, etc before joining QuantArt. And have been in business for the last 8 years.

 

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