Risk Management and Inter-bank Dealings – Hedging of foreign exchange risk

Hedging of foreign exchange risk: revised RBI directions permitting specified derivative contracts and user classifications for authorised dealers.

Regulatory directions revise the hedging framework under FEMA by defining key terms, prescribing that Authorised Dealers classify users as retail or non-retail and offer derivative products accordingly, and by requiring hedges to correspond to contracted or anticipated exposures. ADs must ensure notional and tenor align with exposures, permit cancellations/rebookings with specified treatment of net gains on anticipated exposures, apply suitability and appropriateness policies, and, for large exchange positions, coordinate with exchanges and designated ADs/custodians while users remain liable for compliance.