RBI: Further Relaxations to Exchange Earners, Exporters and AD Category-I Banks

Insignia Consultants

New Delhi

www.insigniaconsultants.in

 

Tuesday, July 31, 2012

 

 --------------------------------------------------------------------------------------------------------------------------------

 

Further Relaxations to Exchange Earners, Exporters and AD Category-I Banks

Reserve Bank of India has reviewed the extant guidelines governing Exchange Earner's Foreign Currency (EEFC) Accounts, cancellation and rebooking of forward contracts booked by the exporters and the Net Overnight Open Position Limit (NOOPL) of the Authorised Dealer Category-I Banks. In order to provide operational flexibility to exchange earners/ exporters and AD Category-I banks, it has been decided:

·         To restore the erstwhile stipulation of allowing credit of 100 percent foreign exchange earnings to the EEFC accounts subject to the condition that the sum total of the accruals in the account during a calendar month should be converted into Rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments;

·         To allow exporters to cancel and rebook forward contracts to the extent of 25 percent of the total contracts booked for hedging their exposure; and

·         For computation of Net Overnight Open Position involving Rupee as one of the currencies, AD Category-I banks need not include the positions taken by their overseas branches and also the delta of the Options Position. It is, however, clarified that these positions will continue to be part of the total NOOPL along with cross-currency positions and positions arising out of exchange traded currency futures/options transactions for calculation of the total foreign currency exposure of banks.

Our view: Exporters can now keep 100% of their receivables in EEFC account for a short duration. Keeping export proceeds in EEFC account is beneficial only (A) Rupee has a depreciating trend (B) There are payment to be made in the same currency.

 

Keeping export proceeds in EEFC account which gives no interest income is a conservative hedging strategy. Nonetheless under the current depreciating trend of the rupee EEFC account will be beneficial to the exporters.

 

Re-allowing cancellations and rebooking is something which the exporters were desperate. However we prefer to keep forex exposure open in inter-bank market and instead hedge in the currency future exchange. The reason is that the Indian foreign exchange market closes at 5:00 pm IST. Banks generally do not allow currency forward booking and cancellations after 4:00 pm IST to small and tiny exporters and importers. Further those exporters and importers who are in small towns face difficulty in hedging in forward market and/or cancellations and rebookings. Exports and imports hedging in currency futures exchanges is much more easier.

 

Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees  have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice.