What changed
Previously, QFIs could invest in rupee-denominated mutual funds, equities, and debt securities, but hedging guidelines were not fully detailed. Now, RBI has explicitly allowed QFIs to hedge currency risk on permissible investments using forward contracts, foreign currency-INR options, and swaps for IPO flows. The circular provides operational guidelines, including eligibility based on investment value, quarterly reviews, and rules for naked hedges and rollovers.
What it means for you
For banks acting as AD Category-I, this expands the derivative product suite for QFI clients, enabling them to manage rupee volatility. Banks must now set up processes to verify underlying exposures quarterly and handle hedge cancellations and rollovers per RBI rules. This could increase demand for forex hedging services from QFIs, boosting fee income but requiring robust compliance.
What you must do
- Update internal policies to allow QFIs to hedge currency risk using forwards, options, and swaps as per the circular.
- Establish quarterly review mechanisms to verify QFI investment values and ensure hedge coverage matches underlying exposures.
- Train staff on handling IPO-related swaps under ASBA and rules for naked hedges, cancellations, and rollovers.
- Communicate these hedging facilities to QFI clients and ensure all outward remittances are net of applicable taxes.
Who it affects
AD Category-I banks, Qualified Foreign Investors (QFIs), Qualified Depository Participants (QDPs), Mutual funds and listed companies with QFI investments
What hedging products are now available for QFIs?
QFIs can use forward foreign exchange contracts (INR as one leg), foreign currency-INR options, and for IPO-related flows, foreign currency-INR swaps.
How often must banks review the underlying exposure for QFI hedges?
AD Category-I banks must review the investment value at least quarterly, based on market price movements, fresh inflows, and repatriations, to ensure the hedge is supported by actual exposure.
Can a QFI rebook a cancelled hedge contract?
No, once a forward contract is cancelled, it cannot be rebooked. However, contracts can be rolled over on or before maturity.