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RBI eases external commercial borrowing hedging provisions RBI eases external commercial borrowing hedging provisions

RBI eases external commercial borrowing hedging provisions

Nov 27, 2018

The Reserve Bank of India (RBI) has decided to reduce the mandatory hedge coverage from 100 per cent to 70 per cent for external commercial borrowings (ECBs) by eligible borrowers for a maturity period between 3 and 5 years.

In a notification issued on Monday, the RBI also said that ECBs falling within the proposed scope but raised prior to November 26 will be required to mandatorily roll over their existing hedge only to the extent of 70 per cent of outstanding ECB exposure. These measures have been decided “in consultation with the Government of India” after a review of the extant provisions, the RBI said. The new provisions will be applicable to Track I (medium term foreign currency denominated ECB with minimum average maturity period 3-5 years) under the ECB framework.

On November 6, 2018, the RBI reduced the minimum average maturity requirement for ECBs in the infrastructure space to three years from earlier five years, a notification said. Additionally, the average maturity requirement for mandatory hedging has been reduced to five years from earlier ten years, the central bank said. The central bank further clarified that ECBs falling under the revised criteria but raised prior to the date of this announcement will not be required to mandatorily roll-over their existing hedges. These rules are applicable to eligible borrowers raising foreign currency denominated ECBs under Track I.

The new rules will make it slightly cheaper for Indian companies and banks to tap the debt markets overseas. In recent months, the cost of borrowings in markets abroad has gone up, partly because of the spike in interest rates in the US and also because the spreads have widened, especially for companies in the emerging markets. In September, ECB borrowings totalled $1.7 billion, far lower than the $4.8 billion raised in August. In July, the borrowings were $2.2 billion.

On October 3, the RBI had announced liberalisation of the ECB policy for public sector oil marketing companies (OMCs) for working capital purposes, wherein, the three OMCs could borrow up to $10 billion subject to conditions. Under the earlier policy, ECB could be raised for working capital purposes from direct and indirect equity holders or from a group company, provided the loan was for a minimum average maturity of five years.

Under the new provision, OMCs can raise ECB for working capital purposes with minimum average maturity period of 3/5 years from all recognized lenders under the automatic route.

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