RBI issues consolidated guidelines on unhedged foreign currency exposure

The RBI said unhedged foreign currency exposure of any entity is an area of concern not only for the individual entity but also for the entire financial system.

Entities which do not hedge their foreign currency exposure can incur significant losses during a period of heightened volatility in foreign exchange rates. Photo credit: Reuters)

The Reserve Bank on Tuesday modified and consolidated guidelines for banks on unhedged foreign currency exposures of any entity to prevent losses due to heightened volatility in the forex market.

The RBI has, from time to time, issued several guidelines, instructions and directives to the banks on Unhedged Foreign Currency Exposure (UFCE) of the entities, which have borrowed from banks.

In the wake of a bank seeking clarification on various aspects related to UFCE, the RBI said a comprehensive review of the extant guidelines has been undertaken and all the existing instructions on the subject have been consolidated.

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These instructions shall come into force from January 1, 2023, it said in a circular.

In an explanatory note, the RBI said unhedged foreign currency exposure of any entity is an area of concern not only for the individual entity but also for the entire financial system.

Entities which do not hedge their foreign currency exposure can incur significant losses during a period of heightened volatility in foreign exchange rates.

These losses may reduce their capacity to service the loans taken from the banking system and increase their probability of default thereby affecting the health of the banking system, the RBI said.

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