An ECB borrower will be required to cover principal as well as coupon through financial hedges wherever hedging has been mandated by the Reserve Bank.
“The financial hedge for all exposures on account of ECB should start from the time of each such exposure (the day liability is created in the books of the borrower),” the central bank said in a clarification on hedging in the case of external commercial borrowings (ECBs).
It has been done with a view to bringing uniformity in hedging practices in the market so as to effectively address currency risk at a systemic level.
RBI further said a minimum tenure of one year of financial hedge will be required with periodic rollover duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of ECB.
It also said “natural hedge”, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows/revenues in matching currency, net of all other projected outflows.
“For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures where revenues are indexed to foreign currency will not be considered as a natural hedge,” RBI clarified.