Today, the RBI has notified a new set of rules for foreign exchange, which are to come into effect immediately.
I glanced over them, and I am glad that I am not longer in FX markets, if only because I don't have to deal with them!
Among the key measures:
- Companies can no longer rebook forward contracts for FX exposures (with INR as one leg)
- Past performance underlying has been reduced to just 25% of the average 3 year exposure for importers. For both importers and exporters, settlement can only be on a deliverable basis
The regulations take a very narrow and static view of market risk management, and India's needs in that regard.
Market risk management is not and cannot be a fire & forget type function. It is dynamic in nature.
This is because as the state of knowledge evolves, prices fluctuate in markets and views and expectations keep changing accordingly.
Thus, even genuine hedgers need flexibility in entering and exiting into hedges.
The RBI is letting a temporary slowdown in the Indian economy affecting its broader vision for the economic internationalization of the country.
Consider, for one, the sheer size of India's international dynamics. We are aiming for exports of USD 300bn in 2011-12 (might not be met, but gives a sense of the order of magnitude).
We hope to finance half of our fabled USD 1 trillion investment in infrastructure over 2012-17 through the private sector, with much of it by foreign investors.
How can such numbers be achieved if the RBI adopts policies more suited to the autarkic pre-1991 days when every economic parameter in India was less than a 10th of what it is today? For further internationalization, controlled sophistication in financial hedging instruments is the need of the hour. You can't tell a person he should avoid diabetes by starving himself.
The timing and lack of warning is another issue.
In an already challenging period such as the current one, how does the RBI expect companies to have the resources and manpower to spare on changing their risk management functions depending on the vagaries of the venerable gentlemen on Mint Street?
They may say this is a short term measure, but that is precisely the point - market participants cannot be made to bear such heavy costs and policy uncertainty when short term volatility is to be addressed. That is the job of the regulator - a job which the RBI is clearly shirking from. They could have intervened verbally, supplied OMCs directly with dollars and so many more things. But they choose to take a great leap backward.
And if they think this will curb speculation - they are completely wrong. This will, if anything, only increase speculation. Most hedgers will hesitate in taking hedges now, knowing that they have zero flexibility once they take the hedge. Speculators meanwhile will continue to run amok on the exchanges, in the NDF markets and other avenues.
Liquidity will go completely for a toss. There will be huge mismatches between the exchange rates in the OTC market and those on the exchanges.
A very retrogade step indeed, and one which will further dampen the international community's confidence in the Indian economy.
I glanced over them, and I am glad that I am not longer in FX markets, if only because I don't have to deal with them!
Among the key measures:
- Companies can no longer rebook forward contracts for FX exposures (with INR as one leg)
- Past performance underlying has been reduced to just 25% of the average 3 year exposure for importers. For both importers and exporters, settlement can only be on a deliverable basis
The regulations take a very narrow and static view of market risk management, and India's needs in that regard.
Market risk management is not and cannot be a fire & forget type function. It is dynamic in nature.
This is because as the state of knowledge evolves, prices fluctuate in markets and views and expectations keep changing accordingly.
Thus, even genuine hedgers need flexibility in entering and exiting into hedges.
The RBI is letting a temporary slowdown in the Indian economy affecting its broader vision for the economic internationalization of the country.
Consider, for one, the sheer size of India's international dynamics. We are aiming for exports of USD 300bn in 2011-12 (might not be met, but gives a sense of the order of magnitude).
We hope to finance half of our fabled USD 1 trillion investment in infrastructure over 2012-17 through the private sector, with much of it by foreign investors.
How can such numbers be achieved if the RBI adopts policies more suited to the autarkic pre-1991 days when every economic parameter in India was less than a 10th of what it is today? For further internationalization, controlled sophistication in financial hedging instruments is the need of the hour. You can't tell a person he should avoid diabetes by starving himself.
The timing and lack of warning is another issue.
In an already challenging period such as the current one, how does the RBI expect companies to have the resources and manpower to spare on changing their risk management functions depending on the vagaries of the venerable gentlemen on Mint Street?
They may say this is a short term measure, but that is precisely the point - market participants cannot be made to bear such heavy costs and policy uncertainty when short term volatility is to be addressed. That is the job of the regulator - a job which the RBI is clearly shirking from. They could have intervened verbally, supplied OMCs directly with dollars and so many more things. But they choose to take a great leap backward.
And if they think this will curb speculation - they are completely wrong. This will, if anything, only increase speculation. Most hedgers will hesitate in taking hedges now, knowing that they have zero flexibility once they take the hedge. Speculators meanwhile will continue to run amok on the exchanges, in the NDF markets and other avenues.
Liquidity will go completely for a toss. There will be huge mismatches between the exchange rates in the OTC market and those on the exchanges.
A very retrogade step indeed, and one which will further dampen the international community's confidence in the Indian economy.
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