RBI allows foreign investors to hedge currency risk in India (2024)

They will have to remain invested in Indian debt for at least a year to avail this facility.

To flush out yield-chasing, short-term investors from the debt market, the RBI barred them from investing in treasury bills, where most of the foreign money has rushed in.

“To encourage longer-term flows and reduce volatility, foreign portfolio investments in G-Secs (government securities) will henceforth be permitted only in dated securities of maturity one year and above, and existing investment in T-bills (treasury bills) will be allowed to taper off on maturity/sale," the central bank said in its first bi-monthly monetary policy.

Foreign investors have invested up to $5.76 billion in Indian debt so far this year, much of it in short-term treasury bills. Foreign investors can invest up to $30 billion in government papers, out of which investment limit for treasury bills is $5.5 billion. Overseas investors have exhausted 87.16% of their treasury bills limit.

“Any investment limits vacated at the shorter end will be available at longer maturities, so overall FPI (foreign portfolio investors) limits will not be diminished," RBI governor Raghuram Rajan said in his policy statement.

Earlier last week, the central bank allowed foreign investors to open accounts with local banks to invest in domestic markets. In the monetary policy, RBI proposed to allow FPIs to hedge their exposure in local exchanges, details of which is being worked out with the capital markets regulator, RBI said.

Allowing domestic hedging facilities is not a means to curb the non-deliverable futures (NDF) markets in locations such as Dubai and Singapore, Rajan said at a press briefing. Investors in NDF markets freely trade in currencies to speculate or hedge their exposure. Such markets are a headache for regulators in various countries, as exchange rates in the domestic markets eventually reflect traded rates in the NDF market. No physical delivery of actual currencies takes place in these markets but investors trade on forward premiums, or the difference between the spot and future price at a particular date.

“This (allowing hedging in India) is not meant to combat the NDF but to add more facilities (for the foreign investors)," Rajan said.

Combating the NDF market is not possible, currency dealers say. Foreign institutional investors will prefer the NDF market to hedge because of the huge volumes in those markets, said Dubai-based Ashwin Shetty, vice-president, global treasury at UAE Exchange, a currency dealer. “Most of the investors in the NDF markets are speculators, running lot sizes of more than $200-300 million. Part of the trade works for hedges as well. That kind of liquidity will not be available in India in the initial years," Shetty said. “Besides, RBI will not allow its exchanges for speculative purpose and foreign investors may not want to provide all the disclosures needed."

It does not matter for an FPI where the hedging is taking place, said Shetty. Besides, not all investments in India is hedged.

The RBI said individuals, firms and companies can book foreign exchange derivative contracts up to $250,000. The central bank also allowed foreign investors to cancel and rebook their contracted exposure.

The central bank in December 2011 had placed some restrictions on this and said cancelled contracts cannot be rebooked fully. Since then, it has gradually eased the restrictions.

The RBI also said it will soon put out guidelines for a partial credit enhancement of corporate bonds.

The enhancement won’t be that useful for companies rated at the lowest investment grade, according to the head of a debt arranger firm. A BBB rated company does not come to the bond market because of the prohibitively high cost. However, if a bank offers a guarantee against the company, the paper is higher rated and can raise funds through the corporate bond market. “It is not clear yet how much is partial credit enhancement. Even if they are enhanced, if there is no full guarantee, an investor may not be interested in these papers," the person said, requesting anonymity.

The central bank in November allowed foreign investors to invest in credit-enhanced corporate bonds but no such transaction has taken place yet.

The lower rated firms get bank loans at 12-13%, but if they have to hit the market without any credit enhancement, they will have to shell out at least 2 percentage points more, said the person cited earlier.

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Published: 01 Apr 2014, 09:11 PM IST