The Reserve Bank of India has decided to ease hedging requirements for medium-term foreign currency borrowings. The move will help bring down the final cost of overseas loans for Indian firms but could leave them more exposed to volatility in the foreign exchange markets.

Medium-term external commercial borrowings will need to be hedged to the extent of 70 percent now compared with 100 percent earlier, according to the new rules notified today. For borrowings already hedged, the roll-over of hedge would only be required to the extent of 70 percent compared to 100 percent earlier.

The relaxed requirements are applicable to ‘track-1’ or medium-term borrowings of three to five years.

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 for ECBs raised under Track I of the ECB framework.

The rule change is in contrast to the RBI’s past attempts to encourage Indian corporations to hedge their foreign currency exposure to the extent possible. The push to increase hedging began after the global financial crisis, where unhedged foreign currency exposures led to significant losses for some firms.

Following that experience, the RBI mandated 100 percent hedging for medium-term external borrowings. It also asked banks to set aside additional provisions against companies which had unhedged foreign currency exposure.

Recently, the RBI eased some of these hedging needs. Prior of Monday’s circular, the regulator relaxed rules for overseas borrowings by infrastructure firms.

On Nov. 6, the RBI reduced the minimum average maturity requirement for infrastructure firms to three years from five years earlier. It also said that longer-term infrastructure borrowings of more than five years would not need to meet minimum hedging requirements.#casansaar (Source - Bloomberg)