MUMBAI – India's central bank Thursday allowed foreign entities that have contributed to rupee-denominated overseas debt of local companies to hedge their currency risk, in a move that could encourage much-needed capital inflows to strengthen the swooning local unit.
The Indian rupee has been the worst-performing Asian currency this year, falling more than 16% against the dollar, weighed by a widening trade deficit and fiscal gap.
India's currency rules allow companies to raise foreign debt denominated in rupees from their overseas equity holders. The decision on hedging may prod foreign companies to bring cash into India through loans to their local units as they could reduce the risks from currency fluctuations.
This is the latest in a string of measures taken by the Reserve Bank of India to boost confidence in the rupee, and ensure that local companies continue to be able to tap offshore funding. Other steps include freeing up the interest rates banks can pay on the deposits of Indians living abroad, in a bid to boost foreign currency inflows into India.
Thursday's decision covers foreign individual investors, companies and Indians living abroad involved in offering overseas debt denominated in rupees.
Any such hedge must be backed by proof of underlying exposure, and must be of a tenor that doesn't exceed the underlying transaction, according to a central bank notification.
