Bankers met over the weekend to discuss this, some sent feelers to RBI, and the issues would be formally raised by an industry body, two persons told ET.
Corporates have been banned by RBI from cancelling and rebooking forward contracts. Why? Exporters who had sold dollars forward (i.e., at a future date), say, at 91 or 92 to protect earnings from exchange rate fluctuations, were cancelling those hedges to book new forwards as the rupee breached 94. This was done to convert more rupees from every dollar. Since the transactions were directional bets on the rupee and not risk management, RBI stopped the practice.
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But, now, corporates, experiencing war-induced disruptions, fear that the directive could restrict them ‘rolling over’ forward contracts if payment against export is deferred, or imported goods take longer to land- likely eventualities during a war.
The fear stems from the fact that technically, a rollover is no different from a cancellation and rebooking: a company closes the existing contract, pays the difference to the bank, and signs a new contract. However, when an exporter with a three-month forward cover, suddenly faces a month or two delay in payment, it would want a new forward that matures at the end of the fifth month when the overseas client pays.
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Corporates and banks want RBI to allow such rollovers where existing contact is closed and a new one booked simultaneously. They want RBI to distinguish rollovers (to extend contract tenors) from regular cancellation and rebooking to gain from currency movements.
“This was discussed on Saturday. The Foreign Exchange Dealers’ Association (FEDAI) may reach out to RBI,” said a banker.
Banks are also awaiting clarification on hedging of external commercial borrowing (ECB). For instance, against a five-year ECB, the forward contract to buy USD to service interest and repayment is 12-18 months.
“Corporates should be able to rollover after 12/18 months so that ECBs remain hedged. Since there’s cancellation and rebooking against the same ECB, RBI could clarify. This was also discussed,” said another banker.
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Banks don’t insist on underlier documents like invoice and client emails for booking forwards up to $100 mn, though corporates must have the papers. Some companies, either slackly interpreting regulations or spurred by aggressive treasuries, overbook. Here, an importer buys more forward dollars than it bills to take advantage of a rising dollar.
Sources said banks may ask companies to give a declaration or certificate that a forward is backed by a certain document that would be produced if needed. This would ensure that the same document is not used for multiple forwards.
“However, genuine hedging requires flexibility. If cash flows are delayed or maturity extends, companies should be allowed to roll over hedges without restriction as there is no speculative intent here,” said Samir Lodha, MD of QuantArt, which advises on hedging strategies to cover forex, interest rate, and commodity price risks.
“In option-based hedging,” said Lodha, “continuous monitoring and course corrections are necessary. Allowing cancellation of an option/forward and switching to another option/forward is important for proper risk management. If RBI has concerns, it can mandate that such cancellation and rebooking must happen at the same time.”
NDF PLAY
What are the big boys doing after the RBI action in the offshore or the non-deliverable forward (NDF) market? In countering speculation, and its impact on the onshore USD-INR rate, RBI has virtually restrained Indian banks from accessing NDFs by capping their net onshore open position. This forced banks to unwind arbitrage deals (buying one-month forward in India and selling in NDF) and stopped corporates from shifting hedging activity to NDF from onshore. When INR dips, USD is stronger in NDF than in the local market.
But, large corporates with operations in several markets are unruffled by the measure. They are riding the gap between the NDF and onshore market which has widened since last week. They are selling USD in NDF and buying USD forward in India. “RBI would never know if the London or Singapore office of a conglomerate strikes a deal with an offshore bank,” said a banker.
RBI has proposed MNC banks in India should share information on NDF positions taken by their offices in other markets. However, most foreign banks have opposed this.
