RBI cuts mandatory hedging to 70% for foreign loans

Further easing the External Commercial Borrowing (ECB) norms, the Reserve Bank of India (RBI) on Monday reduced the mandatory hedging provision to 70 per cent from 100 per cent.

"On a further review of the extant provisions, it has been decided, in consultation with the government of India, to reduce the mandatory hedge coverage from 100 per cent to 70 per cent," the RBI said in a notification.

The relaxation in hedging is for Indian companies raising foreign currency-denominated ECBs under Track I, which refers to medium-term borrowings with average maturity between three and five years, the central bank said.

For ECBs raised earlier, the existing hedge will have to be adjusted only to 70 per cent of the outstanding exposure, the RBI said. 

"Further, it is also clarified that ECBs falling within the aforesaid scope but raised prior to the date of this circular will be required to mandatorily roll over their existing hedge(s) only to the extent of 70 per cent of outstanding ECB exposure," it added. 

The notification, aimed at reducing hedging costs for foreign loans, comes at a time when the economy faces liquidity issues, particularly the non-banking financial companies (NBFC).

Earlier, the regulator had eased hedging rules by reducing the minimum tenure for borrowing through the ECB route to three years from five years. It had also reduced the tenure required for exemption from mandatory hedging to five years from 10 years.

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While the move is likely to boost the local credit market, it will increase the exposure of Indian companies borrowing abroad to fluctuations in the foreign exchange market.