RBI tightens hedging norms for FIIs, helps rupee recover MUMBAI: The Reserve Bank of India has restricted the ability of foreign funds to play in the offshore non-deliverable forward (NDF) market in a bid to ease the pressure on the rupee. According to a communique issued after market hours, RBI has said that foreign institutional investors will have to secure mandates from clients for hedging the underlying securities of sub-account investors and holders of participatory notes. Participatory notes, or PNs, are instruments issued by registered foreign institutional investors to overseas investors who wish to invest in the Indian stock markets without registering themselves with the market regulator. Several FIIs have been using stocks bought in the Indian market to enter into forward deals in India. While such transactions may come across as plain hedging, these deals are in reality arbitrage trades, with FIIs buying forwards in India and selling forwards in NDF markets to profit from the difference. Typically, when the rupee is under pressure, the ND forwards have a higher premium than onshore forwards. Thus an FII buying a month forward in India may be doing a simultaneous trade in NDF to lock in the difference. Such forward trades push up the forward premium in India and impacts the spot dollar-rupee exchange rate. After the RBI released the circular on its website, the rupee gained, closing at 60.44 per dollar, gaining 26 paise from the opening level. The rupee had opened 35 paise weaker at 60.70 per dollar on Thursday, compared with its previous close of 60.35 per dollar. The clarification comes a day after the RBI maintained that it would not defend a particular level, but will monitor volatility in the foreign exchange market. According to currency experts, the Reserve Bank of India will have to continue to monitor NDF activity as speculators may find new ways to trade in the currency. For example, though the RBI has banned cancellations and rebooking of forwards till the hedging contract matures, many in the markets fear that speculation continues, as the dealer who has an underlying asset of say $1 billion, can book a forward contract with an underlying value of $200 million, cancel it, and book a forward on another $200 million of the $800 million still available with the dealer. RBI governor Subbarao indicated on Tuesday that the tight liquidity measures put in place since July 15 would be rolled back once the volatility in the currency market is sufficiently reduced
Posted on: Fri, 02 Aug 2013 17:02:24 +0000