Executive Summary:
This circular from the Reserve Bank of India (RBI) outlines guidelines for Foreign Portfolio Investors (FPIs) to hedge exchange rate risk under the Voluntary Retention Route (VRR). It details eligible derivative products and conditions for hedging exposure related to VRR investments, effective March 1, 2019. The circular also references related amendments to the Foreign Exchange Management regulations.
Key Points / Main Content:
* **Purpose:** To provide guidelines for hedging exchange rate risk for FPI investments under the Voluntary Retention Route (VRR).
* **Eligible Products:** Forwards, options, cost reduction structures, and swaps with Rupee as one of the currencies.
* **Operational Guidelines, Terms, and Conditions:**
* Authorised Dealers (ADs) can offer derivative contracts to eligible VRR users or their group's central treasury.
* ADs must ensure:
* The FPI has exchange rate risk exposure from VRR investments.
* The derivative contract's notional value and tenor do not exceed the exposure's value and tenor.
* The exposure is not hedged with another AD or on an exchange.
* If the exposure value falls below the derivative's notional value, the derivative should be adjusted, unless due to market value changes.
* FPIs are allowed to freely cancel and rebook derivative contracts.
* All hedge-related payments must be met by the FPI using repatriable funds and/or inward remittance through normal banking channels.
Impact Analysis:
Authorised Dealer (AD) Category I banks
* Impact: ADs are authorised to offer specific derivative products to FPIs under VRR, but must adhere to the guidelines and conditions outlined in the circular.
* Action Required: Ensure compliance with the guidelines when offering derivative contracts, including verifying FPI exposure and adherence to notional value and tenor limits.
Foreign Portfolio Investors (FPIs)
* Impact: FPIs are provided with a framework to hedge exchange rate risk on their VRR investments, offering flexibility in managing currency exposure.
* Action Required: Understand the eligible derivative products and conditions for hedging, ensure compliance with AD requirements, and manage hedge-related payments through appropriate channels.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and managing monetary policy.
Foreign Portfolio Investors: Investors who invest in financial assets like stocks and bonds of a country. (FPIs)
Voluntary Retention Route: A route for Foreign Portfolio Investors FPIs to invest in debt. (VRR)
Authorised Dealer Category I banks: Banks authorized by the Reserve Bank of India to deal in foreign exchange.
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Foreign Exchange Management Foreign Exchange Derivative Contracts Regulations, 2000: Regulations pertaining to foreign exchange derivative contracts, issued by the Reserve Bank of India.
Master Direction Risk Management and Inter-Bank Dealings dated July 5, 2016: A comprehensive set of guidelines issued by the Reserve Bank of India regarding risk management and inter-bank dealings.
Mumbai, Maharashtra: The city in India where the Financial Markets Regulation Department, Central Office of the Reserve Bank of India is located.
भारतीय �रज़वर् बैंक
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2018-19/136
A .P. (DIR Series) Circular No. 22 March 01, 2019
To
All Category - I Authorised Dealer banks
Madam / Sir,
Hedging of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary
Retention Route
Attention of Authorised Dealers Category – I (AD Category – I) banks is invited to the Foreign
Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May
3, 2000 (Notification No. FEMA. 25/RB-2000 dated May 3, 2000), as amended from time to time
and Master Direction - Risk Management and Inter-Bank Dealings dated July 5, 2016, as
amended from time to time.
2. A reference is also invited to A.P. (DIR Series) Circular No. 21 dated March 01, 2019 on
Voluntary Retention Route (VRR) for Foreign Portfolio Investors (FPIs) investment in debt. The
operational guidelines, terms and conditions for hedging the exposure to exchange rate risk on
account of investments made under this route are provided in the Annex to this circular.
3. Necessary amendments (Notification No. FEMA 390/2019-RB dated February 26, 2019) to
Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000
(Notification No. FEMA.25/RB-2000 dated May 3, 2000) have been notified in the Official
Gazette vide G.S.R. No. 161 (E) dated February 26, 2019. These are issued under clause (h) of
sub-section (2) of Section 47 of FEMA, 1999 (42 of 1999).
�वत्तीय बाज़ार �व�नयमन �वभाग,क�द्र�य कायार्लय, पहल� मंिजल, मुख्य भवन,शह�द भगत �सहं माग,र् फोटर्,मुंबई–400001.भारत
फोन: (91-22) 2260 3000,फैक्स: (91-22) 22702290 ई-मेल: cgmfmrd@rbi.org.in
Financial Markets Regulation Department, Central Office, 1st Floor, Main Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400001. India
Tel: (91-22) 2260 3000, Fax: (91-22) 22702290 e-mail- cgmfmrd@rbi.org.in
िहन्दी आसान है इसका प्रयोग बढ़ाइए
,4. The directions contained in this circular are issued under Sections 10(4) and 11(1) of the
Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to
permissions/ approvals, if any, required under any other law.
Yours faithfully,
(T Rabi Sankar)
Chief General ManagerAnnex
Hedging of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary
Retention Route
Purpose: To hedge the exposure to exchange rate risk on account of investments made under
the Voluntary Retention Route (VRR)
Products: Forwards, options, cost reduction structures and swaps with Rupee as one of the
currencies
Operational Guidelines, Terms and Conditions:
i. Authorised dealers may offer derivative contracts using any of the aforementioned
products to eligible users under VRR or to its central treasury (of the group and being a
group entity). Authorised dealers shall ensure that:
a. The FPI has an exposure to exchange rate risk on account of investments made
under VRR.
b. The notional and tenor of the contract does not exceed the value and tenor of the
exposure.
c. The same exposure has not been hedged with any other authorised dealer or on
the exchange.
d. In cases where the value of the exposure falls below the notional of the
derivative, the derivative should be suitably adjusted unless such divergence has
occurred on account of change in market value of the exposure, in which case
the FPI may, at its discretion, continue with the derivative contract till its original
maturity.
ii. Authorised dealers shall allow FPIs to freely cancel and rebook the derivative contracts.
iii. Authorised Dealer shall ensure that all payables incidental to the hedge are met by the
FPI out of repatriable funds and/or inward remittance through normal banking channels.
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