What changed
RBI permitted non-resident entities (foreign equity holders, overseas organisations, individuals) to hedge currency risk on INR-denominated ECBs with AD Category-I banks in India. Eligible hedging products include forward contracts, foreign currency-INR options, and swaps. The hedge amount and tenor must not exceed the underlying ECB, and contracts once cancelled cannot be rebooked.
What it means for you
Banks can now offer INR-ECB hedging to non-residents, expanding derivative business and reducing currency risk for borrowers. This facilitates smoother INR-denominated ECB flows, especially for NGOs and eligible borrowers under automatic/approval routes. Banks must ensure strict documentation and no double hedging.
What you must do
- Update internal policies to accept hedging requests from non-residents for INR-denominated ECBs.
- Verify underlying ECB documentation (scanned copies acceptable) on a pre-deal basis.
- Obtain customer undertakings: no double hedging, cancel hedge if underlying is cancelled.
- Ensure settlement via Nostro/Vostro accounts and release funds only after sighting funds.
- Prohibit rebooking of cancelled contracts; allow rollover only if underlying exposure remains.
Who it affects
AD Category-I banks, Non-resident foreign equity holders availing INR ECBs, NGOs engaged in microfinance with INR ECBs, Overseas organisations and individuals lending INR ECBs
Can a non-resident rebook a cancelled hedge contract under this circular?
No, once a hedge contract is cancelled, it cannot be rebooked. However, rollover is allowed on or before maturity if the underlying exposure still exists.
What documentation is needed from the non-resident to hedge an INR ECB?
The non-resident must provide appropriate documentation (scanned copies acceptable) on a pre-deal basis, including details of the underlying ECB transaction, overseas banker, and address, along with an undertaking that the same exposure is not hedged elsewhere.
How should settlement of the hedge contract be handled?
Settlement must be done through the correspondent bank’s Vostro account or the AD bank’s Nostro account. AD banks should release funds to beneficiaries only after confirming receipt of funds in these accounts.