RBI allows QFIs to hedge currency risk of investments

"It has now been decided to allow QFIs to hedge their currency risk on account of their permissible investments (in equity and debt instruments)," the RBI said in a notification. Currency risk arises as QFIs are allowed to invest in rupee-denominated units of domestic mutual fund schemes and listed equity shares.

A QFI is an individual, group or association resident in a foreign country that is compliant with Financial Action Task Force (FATF) standards. QFIs do not include FIIs/sub accounts. As per the notification, QFIs have been allowed to hedge the currency risk on the market value of entire investment in equity or debt in India as on a particular date.

It has also allowed to hedge Initial Public Offers (IPO) related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism. As part of hedging mechanism, the QFIs are allowed to pick forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options.

Foreign Currency-INR swaps are allowed for IPO-related flows, it said. In order to attract foreign funds, the government recently allowed QFIs to invest up to USD 1 billion in corporate bond market and debt schemes of mutual funds without any lock-in period.

This limit shall be over and above USD 20 billion for FII investment in corporate debt. As of now, foreign investors were allowed to invest USD 20 billion in the country's corporate bond market. With this, the ceiling increased to USD 21 billion.