Hedging exchange rate risk by FPIs under VRR Scheme


Proposal revamping the Institutional Trading Platform Framework was notified by the RBI yesterday. RBI notably also notified the operational guidelines for hedging of exchange rate risk by FPI under the VRR  to permit FPIs to participate in currency and interest rate derivative instrument, OTC or exchange-traded, to hedge their interest rate or currency risk. Foreign Exchange Derivative Contracts are governed by RBI under the FEM (Foreign Exchange Derivative Contracts) Regulations, 2000.

It has been made applicable to forwards, options, cost reduction structures and swaps with rupee as one of the currencies.

The RBI has vide this Circular directed Authorized dealers to offer to FPIs investing under the VRR, derivative contracts using forward options, cost reduction structures and swaps with rupee as one of the currencies.

This would be subject that the FPI is exposed to exchange risk, resulting from his investment made under VRR and the same exposure has not been hedged with any other AD or on the exchange. Further, notional and tenor of the contract cannot exceed the value and tenor of the exposure resulted therein, and in case the value of 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.

FPI has to meet all the payments arising herefrom out of repatriable funds and/or inward remittance through normal banking channels only.

There has been significant disinvestment from FPIs in 2018 with several FPIs fleeing Indian market. This move should, to an extent, attract foreign investors to the Indian market.


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