RBI reduces mandatory hedging of overseas borrowings to 70% from 100%

The Reserve Bank of India has reduced mandatory hedging requirement for borrowers raising overseas funds to 70 percent from 100 percent.

The circular comes amid the liquidity crunch in the country among the non-banking financial companies (NBFCs), which can be helped by reducing their hedging costs during overseas fundraising amid some stability in the rupee movement.

These eligible borrowers are those who raise foreign currency denominated ECBs or external commercial borrowings under Track I, having an average maturity between 3 and 5 years. They are mandatorily required to hedge their ECB exposure fully.

“On a further review of the extant provisions, it has been decided, in consultation with the Government of India, to reduce the mandatory hedge coverage from 100 percent to 70 percent for ECBs raised under Track I of the ECB framework by eligible borrowers,” said RBI in its notification.

A hedge is an investment process required to reduce the risk of adverse price or currency movements. A borrower has to hedge in a manner that the projected cash flows match the expectation of the borrowers irrespective of the fluctuations in the foreign currency.

Further, RBI also clarified that ECBs falling within the aforesaid scope but raised prior to the date of this circular will be required to mandatorily roll-over their existing hedge(s) only to the extent of 70 percent of outstanding ECB exposure.

Earlier this month, the central bank had eased the hedging rules by reducing the tenure required for exemption from mandatory hedging of ECB borrowings to five years from previously 10 years.

The RBI had also cut the minimum tenure for borrowing through the ECB route to three years from five years.