Policy Reforms

The steep fall in Indian Rupee has led to troubles for quite a few companies. But some of the worst hits are those that have taken on ECBs (External Commercial Borrowings) in their books. Naturally if the value of rupee depreciates, the loan size for such companies increases. Nevertheless there is a way around this and that is hedging. But as per a report of the Reserve Bank of India (RBI) only 40% of the total ECBs in India are hedged. Many companies prefer not to hedge their foreign currency risks to avoid the financial costs related to such transactions. However, the lack of hedging increases the risk related to these companies particularly when the rupee depreciates sharply as it has done in recent times. As a result RBI has told banks through which the companies avail the ECB route, to ensure that the companies hedge their forex exposure. Further the apex bank has mandated banks to monitor the unhedged portion of the ECB of large companies whose forex exposure exceeds US$ 25 m on a monthly basis