RBI review confusing on forward contracts

EXIM MATTERS

The mid-year review of the monetary policy of Reserve Bank of India has a number of interesting features for exporters and importers but some of them are a bit confusing.

The review says that the importers can now book forward contracts for their customs duty component of imports. The precise instructions of the RBI in this regard are not yet available on its website but I do find it difficult to understand how it will operate in practice.

Importers can book forward contracts with banks to buy a specified amount of foreign currency at a future date or within a specified future period at the agreed exchange rate. The banks are obliged to sell the foreign currency at the agreed rate no matter what the spot rate is on the date of delivery.

Usually, the importers take forward cover against specific exposures in foreign currency i.e. against specific import transactions. They are allowed to book forward contracts even on the basis of the past performance, in which case they should now take delivery of foreign currency of at least 50% (instead of the earlier 75%) against such forward contracts.

Importers can cancel forward contracts, ask for early delivery or extend (i.e. roll over) the forward contracts. In such cases, they have to bear the costs of such cancellations or early delivery or extension. Sometimes the exchange rates may move in such a manner that they may even gain due to the difference between the spot and forward rate (for the original maturity date) on the date of cancellation.

When importers buy foreign exchange either through delivery under a forward contract or when they buy foreign exchange at the spot rate, they use the foreign exchange so acquired to retire import bills or remit advance payment or meet the obligations against accepted bills of exchange that have become due. But, how would they use foreign exchange that they take delivery against forward contracts booked for the customs duty component?

The customs collect import duty in Indian rupees and not in foreign exchange. Will they now start accepting payment of import duty in foreign exchange?

Will it mean that the provisions of Foreign Exchange Management Act will be relaxed to permit one resident (the importer) to make payment to another resident (the Government)? How will the bill of entry be prepared "� in foreign currency or in rupees? How will the importer take Cenvat credit of the additional duty of customs, if payment is made in foreign currency that is bought at an exchange rate different from the exchange rate notified by the government?

These are questions that importers have in mind and it is for the RBI and the customs to come out with clear instructions. The customs may have to even modify their software to accommodate a situation where the importers have a choice to pay import duty either in Indian rupees or foreign currency that they take delivery under forward contracts.

Assuming that the importers will be allowed to pay import duty in foreign currency, the customs perhaps will have no choice but to sell the foreign currency and take rupees from banks. Such a prospect would delight bankers who can make money twice "� firstly, by selling foreign exchange to importers and then buying the same back from the customs.