On January 5, 2024, the RBI’s Financial Markets Regulation Department released an important circular concerning “Risk Management and Inter-Bank Dealings – Hedging of Foreign Exchange Risk.” Set to be effective from April 5, 2024, this document revises the previous guidelines from April 7, 2020.
The significant changes in the circular are:
- Non-Retail User Definition: The RBI has updated the eligibility criteria for non-retail users to engage in structured derivatives. Initially restricted to resident users with a minimum net worth of Rs 500 crores, the new circular expands this to include companies with a turnover of at least Rs 1000 crores.
- Retail and Non-Retail User Classification: The latest circular introduces greater flexibility in classifying users as retail or non-retail. Now, users initially classified as retail can be reclassified as non-retail based on their risk management capabilities, an option not available in the previous circular.
- Currency Risk Definition: The revised circular clearly defines ‘Currency risk’ as the potential for losses resulting from exchange rate fluctuations between the INR and other currencies. This underscores the need for effective management of currency risk, particularly in transactions involving the INR.
- Significance of Interest Rate Derivatives: The circular now places a stronger emphasis on interest rate derivatives for hedging purposes. It specifically describes ‘Hedging’ as engaging in transactions with foreign exchange derivatives or foreign currency interest rate derivatives to manage the impact of expected or firm exposures.
These updates indicate the RBI’s continuous effort to refine foreign exchange risk management and enhance the financial resilience and adaptability of Indian entities in the global economy.