No substitute to proper risk control: RBI

The Reserve Bank of India (RBI) today said there is no substitute for appropriate risk management by all agents especially the financial intermediaries, who face both direct and indirect risk in regard to forex exposures, even as it focuses on managing foreign exchange volatility without any fixed target.

"The direct risk faced by the financial intermediaries is managed through fixing open position and gap limits and reviewing the actual positions on an ongoing basis. As for the indirect risk the RBI's prescription is that all banks should have a policy for looking at such exposures on an ongoing basis and prescribing covenants for hedging while taking on credit exposures on or off the balance sheet," Usha Thorat, executive director, Reserve Bank of India, said.

Authorised dealers (ADs) can swap residents' forex liabilities into rupee liabilities acting as counter-party to the transaction subject to the gap limits.

In case of such swap of rupee into forex liability, ADs can act as counter-party up to only $50 million at any point of time.

This is specifically intended to minimise creation of dollar denominated assets without corresponding liability.

Banks also have specific limits on borrowing at 25 per cent of their capital with exceptions for accessing line of credit for pre and post shipment export credit.

While there are no limits on investing overseas, the regulations specify that such investments must only be in top rated sovereign papers and liquid money market instruments.

"Such exposures would no doubt help banks to lend in forex to their constituents, which is the most preferred currency for borrowing today, but it would bring in its wake the systemic risk of unhedged forex exposures," said Thorat.

Liberalised access to forex loans from banks in India, trade credit and external debt has enhanced the forex exposures of Indian corporates and this is a source of indirect risk to banks that have an exposure to such corporates.