Non-residents can now hedge currency risk with banks
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To protect foreigners who lend to Indian NGOs in a violatile rupee market, the Reserve Bank of India (RBI) has permitted them to buy forward cover for their loans.
The measures announced by RBI said foreign equity holders, including overseas organisations or individuals, can approach Indian bank to hedge their loan. This has become necessary as Indian NGOs can obtain an ECB loan only in Indian rupees. So, if someone provides a $ 100 million loan to an Indian NGO, the sum will be converted to rupees at today’s rate. But with rupee moving down, a year later at reconversion back to dollars, the lender will suffer a capital loss.
The risk of this loss can now be convered through a forward cover from an Indian bank by the foreign lender. But the lender will have to prove that there is indeed an underlying ECB loan for which he needs the cover. This is a peculiar situation that happens only for lending to NGOs. (Indian Express)
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