Mumbai, April 29: Emboldened by the surging foreign exchange reserves and the need to hedge, the Reserve Bank today announced a few more steps that will take the Indian currency towards full convertibility.
In a significant move, the RBI has proposed that Indian companies and resident individuals who can invest only in equities of listed companies abroad be allowed to invest in debt instruments too.
Indian companies and resident individuals will also be permitted to invest in rated bonds/fixed income securities of listed eligible companies abroad subject to certain conditions, the central bank added.
The Reserve Bank has also announced rupee derivatives that will initially be restricted to less complex over-the-counter (OTC) interest rate rupee options, European swap options, call and put options on fixed income instruments and benchmarked rates.
“I am not going to comment on exchange rate of rupee,” RBI governor Bimal Jalan said but appeared comfortable with the surging forex reserves.
Commercial banks, financial institutions and primary dealers will now be allowed to both buy and sell options. Companies may sell options initially without being net receivers of premium.
In the mid-term review in October 2002, the RBI had constituted a working group on rupee derivatives, which would be chaired by Jaspal Bindra.
The scope of the group was later expanded to cover issues related to exchange-traded interest rate derivatives in addition to the issues on over-the-counter (OTC) interest rate derivatives.
At present, mutual funds are allowed to invest in ADRs/GDRs of Indian companies and rated foreign debt instruments/equity within an overall cap of $ 1.0 billion with the permission of Sebi and the RBI.
To expedite investment proposals, the apex bank has simplified the investment process by giving general permission to mutual funds for their overseas investments within the cap, once Sebi’s approval has been obtained.
Further, general permission has been accorded to banks to offer forward contracts to overseas investors to hedge their foreign direct investment (FDI) to the extent of investments made in India.
However, such FDI inflows are not permitted to be sold forward to banks, the RBI clarified. In order to provide greater flexibility to overseas investors and encourage flow of FDI, the central bank has proposed to allow overseas investors making long-term investments to hedge their forex exposures in India, pending investment, by entering into forward sale contracts with banks in India.
At present, resident entities are not allowed to book forward cover in case of transactions denominated in foreign currency but settled in rupees. The RBI has proposed allowing entities which have transactions denominated in foreign currency but settled in rupees to book forward contracts.
Such contracts should be held till maturity and cash settlement would be made on the maturity date.