Even stevens for importers

ANNUAL POLICY 2005-06/ FOREX MARKET

Forward contracts beyond a year can now be cancelled and rebooked

In a significant decision aimed at offering a level playing field to importers vis-a-vis with exporters, the Reserve Bank of India (RBI) today proposed to relax the norms for cancellation and rebooking of all eligible forward contracts booked by residents, irrespective of tenor.

At present, cancellation and rebooking is allowed only for forward contracts of up to one year and it was prohibited for tenors beyond one year in order to reduce volatility.

However, most importers have import payments extended till three to five years or more for importing capital goods. Under the new proposal, forward contracts beyond one year could be cancelled and rebooked depending on the currency view of the corporate.

This relaxation was one of the recommendations of the internal group on foreign exchange markets, set up during the mid-term review in October 2004. The objective of the group was to review comprehensively the initiatives taken by RBI in the foreign exchange market and identify areas for further improvements.

The RBI has pointed out that since the early 1990s, significant liberalisation of the foreign exchange market has taken place and the process gained momentum after the Sodhani Committee recommendations were accepted for implementation.

"The foreign exchange market is now deeper and wider as gauged in terms of parameters such as the range of products, participation, liquidity and turnover," the report said.

The RBI has also urged for better dissemination of information in the foreign exchange market including traded volumes for derivatives such as foreign currency rupee options.

As a step towards further liberalisation, banks are now permitted to open foreign currency accounts for the Indian project offices of foreign companies without taking the prior permission of RBI.

At present, it is mandatory to obtain prior RBI permission before opening the accounts on behalf of the Indian offices set up by foreign companies to avoid capital convertibility issues.