[sbinews] RBI allows hedging at home

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Sat, 13 Dec 2003 07:09:46 +0500

RBI allows cos investing abroad to hedge currency risk at home 

MUMBAI: The Reserve Bank of India (RBI) has allowed companies investing abroad 
in joint ventures or subsidiaries to hedge the currency risk arising out of 
such investments in domestic market, the central bank’s executive director Usha 
Thorat said on Friday. 

“Indian companies having overseas investments through joint venture companies 
have a (currency) risk, which can now be hedged in the local market,” said Ms 
Thorat at the Bank Economists Conference. 

Such risks can be hedged by way of forwards or options, said Ms Thorat. It may 
be recalled that the RBI, in a circular dated December 6, had allowed 
investments in overseas ventures and subsidiaries through the automatic route 
without seeking its approval. 

It had also allowed local partnership firms to invest abroad to the extent to 
100% of their net worth or $10 m (whichever is less) in a given financial year. 

Going further, Ms Thorat said that banks may examine invoicing in rupees by 
exporters and whether this would require a re-look at any of the current 

Speaking on the session on “market mechanism: preparing for the change”, Ms 
Throat said managing volatility without a fixed exchange rate regime of an 
objective, it was important to emphasise that there was no substitute for risk 
management for all agents specially financial intermediaries, who face both 
direct and indirect risks with regard to forex exposures. “The direct risk is 
managed through fixing open positions and gap limits and reviewing the actual 
positions on an ongoing basis,” she said. On the government securities market, 
Ms Thorat said that banks had a role to play in retailing G-secs. “There is a 
whole captive market in the form of co- operative banks and pension funds, 
which would create a sizable demand. (These participants) are today meeting 
through not so good intermediaries,” she said adding, banks can offer two-way 
quotes to other participants in G-secs. Ms Thorat said primary dealers (PDs) 
had achieved good experience in G- secs. “Based on this, we feel
 that in many Asian markets, our PDs can render experience in markets abroad,” 
she said. 

Clearing Corporation of India (CCIL) chairman RH Patil said that banks had 
increasingly been investing in certain instruments on a private placement 
basis, instead of lending directly to corporates. 

“This meant that they were lending money without doing a full credit appraisal. 
“That phase is now going to end. Issuers will now do full disclosures and 
compulsorily trade on stock exchanges,” said Mr Patil. 

“Many entities issuing such bonds would disappear from the market. The annual 
placements in the bond market are Rs 65,000-70,000 crore. The outstanding stock 
of such paper is Rs 2,00,000 crore. These instruments are not traded. Good 
things come only when the regulators force them on you,” he said. 

Mr Patil said that the present regulations led certain assets, which in the 
ordinary course may be deemed non-performing, to be standard ones. “Bonds of 
state level undertakings were performing and rated triple-A since it was 
guaranteed by the state government. 

By definition, loans not serviced turn into junk assets,” he said. Co-operative 
bank loans guaranteed by government were rated “AAA”, he said. Mr Patil said 
that investors were hesitant to invoke guarantees since they would not be able 
to realise funds in this way. 

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