RBI publishes consolidated guidelines on unhedged currency exposure

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The RBI said that any entity’s unhedged foreign currency exposure is a matter of concern not only for the individual entity, but also for the entire financial system.

The RBI said that any entity’s unhedged foreign currency exposure is a matter of concern not only for the individual entity, but also for the entire financial system.

The Reserve Bank on Tuesday amended and consolidated guidelines for banks on unhedged currency exposures of any entity to avoid losses from increased volatility in the foreign exchange market.

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

Following a bank requesting clarification on various aspects relating to the UFCE, the RBI said a comprehensive review of existing guidelines had been undertaken and all existing instructions on the subject had been consolidated.

These instructions will come into force from January 1, 2023, it specifies in a circular.

In an explanatory note, the RBI said that any entity’s unhedged currency exposure is a matter of concern not only for the individual entity but also for the entire financial system.

Entities that do not hedge their foreign currency exposure may suffer significant losses during a period of heightened volatility in exchange rate.

These losses could reduce their ability to service loans taken from the banking system and increase their likelihood of default, thereby affecting the health of the banking system, the RBI said.

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