RBI reduces ECB hedging requirement for cos to 70%

Mumbai, Nov 27: The RBI has eased hedging requirement on external commercial borrowings (ECBs). Companies will henceforth have to hedge only 70% of their loan as against 100% earlier – a move that will help bring down their funding cost. It will also address some of the concerns of the government, which has been pressing the central bank to improve liquidity in credit markets.
The move will also help in improving dollar inflows at a time when some foreign currency deposits are set to mature. Hedging of foreign currency borrowing is akin to buying insurance against the risk of a depreciation of the rupee. While hedging helps protect against exchange rate fluctuations, it increases the cost.
In a circular addressed to all banks, the RBI said, “It has been decided, in consultation with the government, to reduce the mandatory hedge coverage from 100% to 70% for ECBs raised under Track I of the ECB framework.” Track I refers to medium-term ECBs with a minimum average maturity of three-five years by companies. These include those engaged in manufacturing and software development sectors, shipping and airline companies, those in infrastructure sector, asset finance companies and housing finance companies.
This is the second major relaxation in foreign currency borrowing by the RBI. Earlier, the central bank had reduced the minimum tenure for borrowing through the ECB route to three years from five years. It also increased the tenure for mandatory hedging from five years to 10 years.