InvestorQ : Is it correct when the RBI governor says there are hardly any unhedged exposures on ECBs in India?
Niti Shenoi made post

Is it correct when the RBI governor says there are hardly any unhedged exposures on ECBs in India?

ishika Banerjee answered.
3 weeks ago

I suppose your question pertains to the fact that there is apparently a dichotomy of view. On the one hand, newspapers have been crying hoarse about $79 billion of unhedged borrowings while the RBI governor has dismissed the risk as too minor at the current juncture. The truth perhaps likes somewhere in between. Das has underlined that a very predominant part of the outstanding external commercial borrowings (ECBs) has already been effectively hedged and hence the fear of dollar losses were unwarranted.

Commenting on the rupee weakening, Das underlined that the so-called unhedged forex exposure had to be viewed and understood in the right context. He also added that the RBI did not have any level of rupee in mind and would rather take it as it comes. The basic focus of the RBI was to prevent too much of disruption and volatlitiy in the dollar rupee market. He added that the RBI was largely agnostic to the level of the rupee as long as it was on an acceptable range. Their low tolerance was only for too much currency volatility.

Amidst the volatility in the currency, a small note in the June 2022 Financial Stability Report of the RBI had caught the attention of the markets. The statement had said that out of the outstanding external commercial borrowings (ECBs) of $180 billion, about 44% or $79 billion, was unhedged. However, Das mentioned that this included $40 billion of liabilities of PSU companiesin the petroleum sector, railways and power space. However, these sectors had assets with a natural hedge built into them, so the risk was actually much smaller.

Out of the remaining so-called unhedged loans of $39 billion, it largely pertained to private companies in India wherein the borrowings had a natural hedge in the form of foreign currency earnings. For instance, a diamond company has foreign currency loans to import roiughs. However, it sells most of the polished diamonds in the global market so the foreign currency earnings becomes a natural hedge for them. Once these factors are netted out, according to Das, the overall currency risk for the economy as a whole is limited.

However, Das has also added that many of these risks may have an impact on the rupee in the short term, even if not in the medium to long term. To that extent, the RBI would continue to remain watchful of the headwinds. In fact, Das has underlined that the RBI would be more than proactive in taking measures to ensure financial stability. In the last few months, the RBI has been drawing down on its forex reserves to defend the rupee against the vagaries of global volatility, although it has not prevented the sharp fall.