Eases FE earnings, forwards norms

The Reserve Bank of India (RBI), on Tuesday, announced that it will allow companies to keep all of their foreign exchange earnings and ease restrictions on forwards contracts, while reversing two regulations passed during periods of intense rupee volatility.

The moves come after the rupee has recovered after hitting a record low against the dollar in late June, and help address complaints from some companies that RBI regulations were restricting their foreign exchange risk management.

 Traders said the move was ultimately positive for the rupee given the added flexibility provided, especially to exporters, though in the short-term it could reduce dollar supply in the market.

Further, RBI will reverse its May directive mandating exporters to convert 50 per cent of their foreign exchange holdings in their accounts into rupees, which had been intended to stem falls in the local currency during that period.  The exporters and other companies affected by that directive will now be allowed to retain all of their foreign currencies in their Exchange Earners Foreign Currency (EEFC) accounts. RBI said it will allow exporters to cancel and rebook forward contracts comprising up to 25 per cent of their total hedged exposure.

Although the move had been intended to reduce volatility in forex markets during another bout of instability for the rupee, the regulations restricted exporters’ ability to manage risk, making it difficult to adjust their forward contracts.

RBI had already partially rolled back its regulations earlier this month by allowing exporters to cancel and rebook contracts with tenors of over one year.
RBI also tweaked rules in December that had forced banks to reduce their foreign exposure via their net overnight open positions. The directive sought to reduce the intra-day open positions that banks could hold. RBI said rupee exposure would not be included in calculating their net overnight open position limits.

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