Cos can hedge exchange rate risks: RBI

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SME Times News Bureau | 29 Dec, 2010
Under pressure from Indian multinational corporations, the Reserve Bank of India (RBI) has allowed them to hedge exchange rate risks associated with trade transactions and external borrowings through cross-currency options.

However, the central bank has attached certain safeguards to this rule, and only those companies will be allowed hedging that have a minimum networth of Rs 100 crore and adequate risk management capabilities.

The guidelines will be effective from 1st February 2011.

Earlier, RBI had proposed to do away with cost reduction structures. It has reviewed the stance after Indian firms having global operations represented that prohibitions on the use this instrument would impede their forex risk management operations and their global competitiveness.

The revised guidelines have permitted "the use of cost reduction structures, both, under the contracted exposures and past performance routes, subject to certain safeguards like minimum net worth, risk management capabilities of the corporate", the central bank said.

The cost reduction structures are used by firms to hedge the exchange rate risk arising out of trade transactions through cross currency option.

The purpose is "to hedge exchange rate risk arising out of trade transactions and External Commercial Borrowings (ECBs)," said RBI's Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks.