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FIIs Can Now Hedge Currency Risk with Any AD Category I Bank

Current · Source: Reserve Bank of India · RBI/2012-13/258 · issued 22 Oct 2012 · ~2 min read
Quick answerRBI now allows FIIs to hedge currency risk on their entire equity/debt investment in India through any AD Category I bank, not just designated branches. Conditions include a valuation certificate, global hedge declaration, and quarterly confirmation to the custodian bank.
The rule, in the simplest words
How it plays out — a real example

A forex & trade-finance officer in Indore helps a Foreign Institutional Investor (FII) hedge their currency risk by providing a valuation certificate and ensuring the hedge is settled through the designated bank's Special Non-Resident Rupee Account. The officer ensures the FII's quarterly declaration is submitted to the custodian bank, maintaining compliance with RBI regulations.

What changed

Previously, only designated branches of AD Category I banks maintaining FII accounts could act as market makers for FII currency hedging. Now, FIIs can approach any AD Category I bank for such hedging, subject to conditions like providing a valuation certificate from the designated bank and a global hedge declaration.

What it means for you

This expands FIIs' access to hedging facilities, potentially increasing competition among banks for FII business. Banks must ensure compliance with documentation requirements, including valuation certificates and quarterly declarations, and settle hedges through the designated bank's Special Non-Resident Rupee Account via RTGS/NEFT.

What you must do

Who it affects

All AD Category I banks, FIIs investing in Indian equity and debt markets, Custodian banks handling FII accounts

❓ Common questions

Can FIIs now hedge with any AD Category I bank without prior approval?

Yes, FIIs can approach any AD Category I bank for currency hedging, but they must provide a valuation certificate from their designated AD bank and a declaration that global hedges plus cancelled contracts are within the market value of their investments.

How should hedges taken with non-designated banks be settled?

Hedges taken with AD banks other than the designated bank must be settled through the Special Non-Resident Rupee Account maintained with the designated bank, using RTGS or NEFT.

What quarterly reporting is required from FIIs?

FIIs must provide a quarterly declaration to the custodian bank confirming that the total amount of derivatives contracts booked across all AD Category banks is within the market value of their investments.

📜 Read the original circular — full text as issued by RBI
RBI/2012-13/258 A.P. (DIR Series) Circular No.45 October 22, 2012 To, All Authorised Dealer Category – I Banks Madam / Sir, Facilities for Persons Resident outside India – FIIs Attention of Authorised Dealers Category – I (AD Category – I) banks is invited to the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May 3, 2000 [Notification No. FEMA/25/RB-2000] and A.P. (DIR Series) Circular No.32 dated December 28, 2010 , as amended from time to time. 2. As per the extant guidelines, only designated branches of AD Category I banks maintaining accounts of FIIs are allowed to act as market makers to FIIs for hedging their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date. 3. It has now been decided to allow FIIs to approach any AD Category I bank for hedging their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date subject to the following conditions: The eligibility for cover may be determined on the basis of a valuation certificate provided by the designated AD category bank along with a declaration by the FII to the effect that its global outstanding hedges plus the derivatives contracts cancelled across all AD category banks is within the market value of its investments. The FII should also provide a quarterly declaration to the custodian bank that the total amount of derivatives contract booked across AD Category banks are within the market value of its investments. The hedges taken with AD banks other than designated AD banks, have to be settled through the Special Non-Resident Rupee A/c maintained with the designated bank through RTGS/NEFT. 4. AD Category – I bank may bring the contents of this circular to the notice of their constituents and customers. 5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law. Yours faithfully, ( Rudra Narayan Kar ) Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2012-13/258 · issued 22 Oct 2012. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
🏦 Branch Manager
  • Update internal policies to allow any AD Category I branch to offer currency hedging to FIIs, not just designated branches.
📜 Compliance
  • Require FIIs to provide a valuation certificate from their designated AD bank and a declaration that global hedges plus cancelled contracts are within investment market value.
  • Ensure hedges booked with non-designated banks are settled through the designated bank's Special Non-Resident Rupee Account via RTGS/NEFT.
  • Collect quarterly declarations from FIIs confirming total derivatives contracts are within investment market value and share with custodian bank.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are a Branch Manager at a bank this circular applies to (All AD Category I banks, FIIs investing in Indian equity and debt markets, Custodian banks handling FII accounts), your first concrete step on “FIIs Can Now Hedge Currency Risk with Any AD Category I Bank” is: “Update internal policies to allow any AD Category I branch to offer currency hedging to FIIs, not just designated branches.” (RBI issued this 22 Oct 2012).

  1. Circular: RBI/2012-13/258 -- FIIs Can Now Hedge Currency Risk with Any AD Category I Bank
  2. Issued: 22 Oct 2012
  3. Action required: Update internal policies to allow any AD Category I branch to offer currency hedging to FIIs, not just designated branches.
  4. Action required: Require FIIs to provide a valuation certificate from their designated AD bank and a declaration that global hedges plus cancelled contracts are within investment market value.
  5. Action required: Ensure hedges booked with non-designated banks are settled through the designated bank's Special Non-Resident Rupee Account via RTGS/NEFT.
  6. Action required: Collect quarterly declarations from FIIs confirming total derivatives contracts are within investment market value and share with custodian bank.
  7. Owner: ____________ Target date: ____________
  8. Board/committee approval needed? Y / N
  9. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=7637&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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