PART C - RISK MANAGEMENT
Facilities for Residents
Forward Exchange Contracts:
3C.1 (i) Authorised dealers may enter into contracts for forward purchase and
sale of foreign currency with residents who have a crystallised exposure to
exchange risk in respect of genuine transactions permitted under Exchange
(ii) The choice of the currency and tenor are left to the customer. Where the
exact amount is not ascertainable owing to the rates/costs being linked to
variable factors, contracts may be booked on the basis of a reasonable estimate.
However, the maturity of the cover should not exceed the maturity of the
(iii) Foreign currency loans/bonds become eligible for cover only after final
approval is accorded by the Reserve Bank for the arrangement. In respect of
Global Depository Receipts (GDRs) the issue price should have been finalised to
be eligible for cover.
(iv) Balances in the EEFC accounts may be allowed to be sold forward by the
account holders provided they remain earmarked for delivery. Such contracts
should not, however, be cancelled.
(v) While booking contracts, suitable documentary evidence should be verified
to ensure that an exposure exists, to the extent of the amount of cover sought.
Full particulars of contract should be marked on such documents under proper
authentication and copies thereof retained on record for verification.
(vi) Contracts involving rupee as one of the currencies, once cancelled
cannot be re-booked. They may, however, be rolled over at ongoing rates on or
(vii) As an exception to (vi) above, contracts covering export transactions
may be cancelled, re-booked and rolled over at ongoing rates.
(viii) Substitution of contracts covering trade transactions may be
permitted, if the authorised dealer is satisfied after verification of suitable
documentary evidence, with the circumstances under which such substitution has
Foreign Currency - Rupee Swaps:
3C.2 Authorised dealers may arrange foreign currency - rupee swaps between corporates who run long-term foreign currency exposures. Entities who do not
have any forex exposure but are willing to assume a forex liability in lieu of
their long term rupee liability may also become counter parties in the
arrangement. As far as possible such transactions should be concluded on a
matched basis. However, where this is not feasible authorised dealers may
temporarily warehouse the swaps/absorb the mis-matches within their open
position and gap limits.
NOTE : Authorised dealers should not allow the swap route to become a
surrogate for forward contracts for those who do not qualify for forward cover
under paragraph 3C.1.
Hedging of Loan Exposures
3C.3 (i) Authorised dealers may offer the undernoted products to corporates
either on a back-to-back basis or by booking the transaction overseas with the
branch of an authorised dealer in India.
Interest rate swaps
Interest rate caps/collars (purchase)
Forward Rate Agreements
(ii) Before entertaining any request for any of these facilities, the
authorised dealer should ensure that
the Reserve Bank has accorded final approval for the conclusion of the
underlying loan transaction;
the notional principal amount of the hedge does not exceed the outstanding
amount of the foreign currency loan;
the maturity of the hedge does not exceed the remaining life to maturity of
the underlying loan;
the Board of Directors of the corporate has drawn up a risk management
policy, laid down clear guidelines for concluding transactions, and
institutionalised arrangements for a quarterly review of operations and annual
audit of transactions to verify compliance with the regulations.
the hedge results in reduction of the risk of exposure and there is no net
inflow of premium, direct or implied in cases where option components are built
into the hedge strategy;
(iii) Corporates may be permitted to unwind a hedge transaction.
(iv) A report of the transaction (booked/cancelled), verified by the
authorised dealer should be submitted to the concerned Regional Office of the
Reserve Bank, within a week of its conclusion.
(v) Authorised dealers should obtain from the concerned corporates copies of
the quarterly reviews and annual audit reports vide paragraph (ii) (d) above.
(vi) Payment of upfront premia, if any, as well as all other charges
incidental to the hedge transaction may be effected without the prior approval
of Reserve Bank.
Other Derivatives - Foreign Currency Options
3C.4 (i) Authorised dealers may offer cross currency options to residents to
cover their genuine exposures including contingent exposures like tender bids.
Cost effective risk reduction strategies like range forwards, ratio-range
forwards and such other variables may also be offered to customers provided
there is no net inflow of premium. These products may be allowed to be freely
booked and cancelled.
(ii) The option should be written on a fully covered back-to-back basis. The
cover transaction may be undertaken with overseas banks/internationally
recognised approved option exchanges/other authorised dealers in India.
Note: As an exception to this rule, options offered to clients to hedge loan
exposures may be directly booked overseas with the branch of an authorised
dealer in India.
(iii) Option premium may be remitted without the prior approval of Reserve
(iv) Authorised dealers who propose to write options, should apply to the
Chief General Manager, Exchange Control Department, (Forex Markets Division),
Reserve Bank of India, Central Office, Mumbai for permission.
Hedging of Commodity Price Exposures
3C.5 Indian corporates seeking to hedge commodity price exposures (excluding
oil and petroleum products) should approach Reserve Bank through a bank. The
guidelines to be followed in this regard are given in Annexure II. The proposal
with the bank's recommendation should be forwarded to the Chief General Manager,
Exchange Control Department (Forex Markets Division), Reserve Bank of India,
Central Office, Mumbai 400001.
Facilities for Non-Residents
3C.6 Authorised dealers may offer forward cover to:
(A) Foreign Institutional Investors (Fund-wise or FII-wise) for their
investments in India as detailed below: