New Delhi: Sahoo panel has suggested that the hedge ratio may be decided by the authorities (MOF-RBI Committee) keeping in view the financing needs of the firms and of the economy, the development of onshore currency derivatives markets and any other systemic concern such as volatility in global risk tolerance.
The ratio may be modified by the authorities periodically depending on the exigencies, it said. Since hedging would be the key lever of the ECB policy, RBI should review the arrangement for monitoring the hedging compliance by borrowers, and strengthen it, if required, expeditiously, it said. The Committee recommended that the board of every borrowing company must be obliged to certify at least once a year that the company fulfils the hedging requirement.
In addition, RBI, directly or through authorised dealers, may undertake inspection of books of a sample of borrowers to confirm adherence to hedging norms. ECB policy, it said, should be used only to address the market failure inherent in foreign currency borrowing. The debt component of FCCB (foreign currency convertible bond) should be governed by the revised ECB framework, it said.
"The Indian domestic rupee debt market is a viable alternative to ECB for financing Indian firms and does not entail any market failure. The policy should aim at removal of all impediments to the development of the domestic rupee debt market," it said. According to the report, since ECB borrowing firms introduce risk to the system, they need to be obliged to hedge the risk either through natural hedge or financial hedge (in currency derivative market).
However, it said, the cost of hedging should be minimum so that the gains from ECB are not frittered away in derivative transactions and ECB becomes prohibitively costly. Two members of the panel - G Padmanabhan and S Ravindran, did not fully concur with some of the recommendations and observations made in the report, it added.
