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RBI revises facilities to Hedge Foreign Exchange Risk under FEMA [Read Circular]

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The Reserve Bank of India (RBI) revised facilities for residents and non-residents to hedge their foreign exchange risk on account of transactions permitted under the Foreign Exchange Management Act (FEMA), 1999.

The circular was issued on Tuesday addressing all the Category-I of Authorised Dealers. The circular seeks to withdraw all the previous operational guidelines, terms and conditions.

The directions were issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999)

The circular provides for revised guidelines consisting of the general and specific directions for Authorised Dealers and direction for exchange; the user classification framework is also elaborated. The circular sought to amend the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulation, 2000. The amendment Act came to be known as Foreign Exchange Management (Foreign Exchange Derivative Contracts) (First Amendment) Regulation, 2020.

The Foreign Exchange Management (Foreign Exchange Derivative Contracts) (First Amendment) Regulation, 2020 seeks to substitute, “authorized dealer”, which means a person authorized as such by Reserve Bank under Section 10 (1) of the Act; and “Foreign exchange derivative contract” which means a financial contract which derives its value from the change in the exchange rate of two currencies at least one of which is not Indian Rupee or which derives its value from the change in the interest rate of a foreign currency and which is for settlement at a future date, i.e. any date later than the spot settlement date, provided that contracts involving currencies of Nepal and Bhutan shall not qualify under this definition.

“A person, whether resident in India or resident outside India, may enter into a foreign exchange derivative contract or exchange-traded currency derivative contract in accordance with provisions contained in Schedule I of this regulation,” the circular said.

The circular notified, “the directions issued by the Reserve Bank of India (RBI) shall be implemented from June 1, 2020, and replace the existing directions in Part A – Section I and II and Part D of the Master Direction on Risk Management and Interbank Dealings dated July 5, 2016, as amended from time to time”.

To Read the full text of the Circular CLICK HERE
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