RBI issues Clarifications on Hedging for External Commercial Borrowings

The Reserve Bank of India (RBI) on 7 November 2016 issued the Clarifications on hedging for External Commercial Borrowings (ECB).

The Clarifications were issued under section 10(4) and 11(1) of the Foreign Exchange Management Act, 1999.

Highlights of the Clarifications
• Wherever hedging is mandated by RBI, the ECB borrower will be required to cover principal as well as coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure.
• A minimum tenor of one year of financial hedge will be required with periodic rollover duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of ECB.
• Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows in matching currency, net of all other projected outflows. For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity within same accounting year.
• The designated bank will have the responsibility of verifying that 100 percent hedging requirement is complied with. All other aspects of the ECB policy shall remain unchanged.