CONNECT WITH US
Fintech

Fintech

RBI’s forex reserve clarification leaves importers and banks with a new hedging cost

ET BFSI Fintech logo

Published on

Add as a preferred source on Google
RBI’s forex reserve clarification leaves importers and banks with a new hedging cost

RBI’s forex reserve clarification leaves importers and banks with a new hedging cost

The cost of maintaining the reserve is adding to the expense of hedging dollar purchases, while disruption in the forward market has pushed implied hedging costs to multi-year highs.

The Reserve Bank of India’s clarification of its foreign exchange risk reserve (FERR) rules has narrowed uncertainty over which currency derivatives attract the new requirement, but banks must still lock up cash without earning interest. The cost of maintaining the reserve is adding to the expense of hedging dollar purchases , while disruption in the forward market has pushed implied hedging costs to multi-year highs. The RBI will supply dollars to Indian Oil, BPCL and HPCL through designated banks to reduce pressure on the rupee.

FERR requires banks to set aside 20 per cent of the rupee equivalent of eligible derivative contracts, with no interest earned on the reserve. Customer hedges of current account transactions attract the requirement when the customer buys foreign currency against the rupee and the notional value exceeds $2 million; eligible bank hedges are also covered. Banks are passing on additional hedging costs of 11-14 paise per month, prompting some importers to favour shorter-dated forward contracts. Implied hedging costs surged to 4.6 per cent for one-year contracts on October 15, amid liquidity strains and disruption in the forward market.

The FERR applies to specified rupee-linked foreign exchange derivative contracts used by customers to hedge current account transactions when they buy foreign currency against the rupee and the notional value exceeds $2 million.


Source link
Related Topics:Fintech

Disclaimer

We strive to uphold the highest ethical standards in all of our reporting and coverage. We TheMorningPulse.fyi want to be transparent with our readers about any potential conflicts of interest that may arise in our work. It's possible that some of the investors we feature may have connections to other businesses, including competitors or companies we write about. However, we want to assure our readers that this will not have any impact on the integrity or impartiality of our reporting. We are committed to delivering accurate, unbiased news and information to our audience, and we will continue to uphold our ethics and principles in all of our work. Thank you for your trust and support.