RBI said that unhedged foreign exchange exposure of any entity is a matter of concern not only for the individual entity but also for the entire financial system.
RBI said that unhedged foreign exchange exposure of any entity is a matter of concern not only for the individual entity but also for the entire financial system.
The Reserve Bank on Tuesday revised and consolidated guidelines for banks on unhedged foreign exchange exposure with any entity to prevent losses due to excessive volatility in the foreign exchange market.
RBI has from time to time issued several guidelines, directions and instructions to banks on Unhedged Foreign Currency Exposure (UFCE) of entities borrowed from banks.
In view of the bank seeking clarifications on various aspects relating to UFCE, RBI said that a comprehensive review of the existing guidelines has been done and all existing directions on the subject have been consolidated.
These directions will come into effect from January 1, 2023, it said in a circular.
In an explanatory note, the RBI said that unhedged foreign exchange exposure of any entity is a matter of concern not only for the individual entity but also for the financial system as a whole.
Entities that do not hedge their foreign exchange exposure can incur significant losses during periods of increased volatility in foreign exchange rates.
RBI said these losses can reduce their ability to repay loans taken from the banking system and increase their chances of default, affecting the health of the banking system.