Opening New Doors: The Reserve Bank of India Allows FPI To Hedge Currency Risk
Opening New Doors: The Reserve Bank of India Allows FPI To Hedge Currency Risk
The Reserve Bank of India has given permission to foreign portfolio investors and domestic players to hedge their currency risk without underlying exposure to the amount of $10 million. The central bank has also placed a limit of $10 million on the proprietary positions of banks in exchange traded currency futures.
In July during the peak of the rupee crisis, the RBI had barred all banks from taking proprietary positions in currency futures market. FPIs can hold position both long(bought) as well as short (sold) in foreign currency up to $10 million or equivalent per exchange without establishment of any underlying exposure. The limit has been placed at both day-end as well as intra-day according to the notification.
FPIS can now no longer take a short position beyond $10 million at a point in time or take long positions beyond $10 million in any exchange. There is a requirement to have underlying exposure. RBI will now make the move to liberalize the Indian market for foreign investors.
FPIs will also be able to hedge the currency risk emerging from market value of the exposures to Indian debt and equity securities. Investors can also participate in currency futures/exchange traded option market through registered and/or recognized trading member of the exchange concern.
The RBI says the duty of ensuring the existence of the underlying exposure will now be placed with the foreign investor. The RBI has also said that domestic participants will now be able to take both long as well as short positions reaching up to $10 million per exchange without the existence of underlying exposure. Exchanges can now prescribe a fixed limit for the contracts in currencies other than the US dollar and the limit is within $10 million.
The RBI has also said that domestic participants take a position exceeding $10 million in ECTD (exchange traded currency derivative market) to establish the existence of an underlying exposure. The RBI will also set a limit of $10 million on the proprietary positions in exchange-traded currency derivatives. They have also allowed foreign portfolio investors to hedge currency risks without exposure up to the same limit. Currency dealers will now have to move to increase liquidity in the market.
The responsibility of ensuring the existence of the underlying exposure rests with the FPI in question. RBIs have also allowed FPIs to access the currency futures or exchange traded currency options for hedging the currency risk emerging out of the market value of the exposure.
RBI has indicated that the exchange will also be able to impose additional restrictions as prescribed by the SEBI for the purpose of risk management and fair trading. The RBI has issued these directives as part of its bi-monthly policy in June.
