The Reserve Bank of India (RBI) on Friday issued revised draft guidelines on foreign exchange derivatives and overseas hedging of commodity price risk and freight risk, inviting comments and suggestions.

Among the products that can be used are forward foreign exchange contracts, cross currency options (not involving the rupee), foreign currency-rupee options, foreign currency-rupee swaps, cost reduction structures, cross currency swap, interest rate swap, coupon swap, interest rate cap or collar (purchases) and forward rate agreement, according to the guidelines.

The products specified by RBI also include forward foreign exchange contracts, cross currency options (not involving the rupee) and foreign currency-rupee options. The RBI said in a statement that in the light of developments in the domestic and international financial markets, the extant guidelines on OTC foreign exchange derivatives has been reviewed.

The draft guidelines, interalia, proposed to withdraw the facility of zero cost /cost reduction structures, permit importers and exporters having foreign currency exposures in trade transactions to write covered call and put options both in foreign currency-rupee and cross currency and also receive premia. Corporates having global business had represented to the Reserve Bank that prohibiting zero cost structures would seriously impede their forex risk management operations and global competitiveness.

Further, if such structures were banned, some corporates may not hedge their currency exposures due to cost consideration and this may lead to aggregation of unhedged position, which is riskier than hedging within a range. Hence, they represented that cost reduction structures may be permitted, with suitable safeguards, such as higher net worth and a suitable risk management policy. Some categories are permitted under special dispensation, including small & medium enterprises (SMEs) who may be permitted to book forward foreign exchange contracts without production of underlying documents for hedging their direct /indirect exposure to foreign exchange risk.

The draft guidelines suggest that foreign institutional investors (FIIs), persons having foreign direct investment in India and non-resident Indians (NRIs) be allowed to hedge their contracted foreign exchange exposures through Forward Foreign Exchange Contracts and Foreign Currency-INR Options.

Authorised dealers, the guidelines say, can hedge to manage assets and liabilities, gold price risk and currency risk on capital.

The guidelines add that residents are permitted to use OTC and exchange-traded commodity derivatives in international markets for hedging their exposures to commodity price risk subject to conditions.