RBI will carry out a ‘comprehensive review’ of FEMA 25, along with the government, to allow greater flexibility in derivatives transactions and currency
hedging

The Reserve Bank of India (RBI) will carry out a “comprehensive review” of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000, along with the government, to allow greater flexibility in derivatives transactions and currency hedging. The announcement by the central bank on Wednesday to re-evaluate the regulation, also known as FEMA 25, comes amid a volatile rupee fuelled by fears of a global trade and currency war.

“It is now proposed to undertake a comprehensive review of FEMA 25, in consultation with the Government of India, to, inter alia, reduce the
administrative requirements for undertaking derivative transactions, allow dynamic hedging, and allow Indian multinationals to hedge the currency risks of their global subsidiaries from India,” RBI said in a statement.

The draft circular on revised guidelines will be issued by the central bank by the end of September for public comments.

The rupee depreciated to a record low against the dollar on 20 July, dropping to as low as ₹69.12 to a dollar. It closed at ₹68.43 on Wednesday.

“It (review of regulations) is meant to make the current set of regulations more principle-based in order to incentivize hedging transactions and disincentivizing transactions, which may look like hedging transactions but are not,” Viral Acharya, RBI’s deputy governor, said at a press meet to discuss the monetary policy.

We are also hoping to encourage as part of the review mechanism through which Indian MNCs can hedge their global currency risks and in non-rupee cross-currency pairs out of their treasury operations in India,” Acharya said.

According to forex experts, the guidelines may permit greater flexibility to banks and companies to participate in relatively more complex products, which it has been hesitant about in the past. “The rupee has been very volatile and there is a need for greater flexibility in hedging and derivatives transactions under such circumstances,” said Abhishek Goenka, founder and chairman at IFA Global, a Mumbai-based forex advisory and treasury consulting firm.

Goenka said the current rules make it difficult for a new exporter or importer, as well as small and mid-sized companies to book forward contracts in cases where the track-record is unavailable or the companies have not been able to meet the turnover threshold requirements.

source: livemint.com