Banks to frame policies to hedge currency risks

Written by Sunny Verma | New Delhi | Updated: Jan 26 2012, 09:42am hrs
To mitigate the side-effects of rupee volatility, the Reserve Bank of India (RBI) will mandate boards of banks to formulate policies on hedging of currency risk. While the decision on hedging a particular exposure will be left to the banks, RBI would prefer banks hedging any exposure to a client exceeding $25 million on monthly basis.

RBI governor D Subbarao said on Tuesday the central bank will unveil norms in next 10 days to address the issue of hedging forex exposure. This will eliminate the arbitrariness with which banks currently offer hedging instruments as part of their foreign loan contracts. RBIs estimate shows that 60% of the banks foreign currency loans are not hedged.

Subbarao said that the central bank will not mandate hedging of the entire forex exposure of the banks, but will ask them to lay down policies for hedging of large exposures. Banks are currently following a random approach and offer hedging facilities on a case-to-case basis.

When asked why RBI is not making it mandatory for banks to hedge their entire forex exposure, Subbarao said: This is because we have moved away from micro-managing the banks. RBI had already asked banks to report any forex exposure exceeding $25 million per client.

The rupee, which fell as much as 18.7% between August 5 and December 15 in the previous calendar, recovered in recent weeks after RBI took measures to curb speculative trading in the currency last December. The measure that arrested the steep fall and the volatility in rupee will not be rolled back.

The exact mechanism of hedging the forex exposure will be left to the banks that will decide it based upon the risk profile of the client. Bankers said RBI would want them to ensure that at least 60% of the forex exposure of large clients is hedged.

RBI deputy governor Anand Sinha said banks should not leave the decision of hedging the forex exposure entirely on corporate and rather advise them to take a cover. You cannot have 100% of the risk unhedged. Banks should not leave it on corporates to hedge or not, Sinha said. This is important to protect bank's balance sheets, he said.