To stem the rupee’s fall against the dollar, the Reserve Bank of India on Thursday clarified that foreign institutional investors (FIIs) need a mandate from Participatory Note (P-Note) holders to hedge on their behalf.
Following the clarification, the rupee recovered from a low of 60.89 to close at 60.44 to a dollar.
P-Notes are derivative instruments used by offshore investors to invest in the domestic stock market without revealing their identity.
The RBI’s move is aimed at reducing speculation and, thereby lowering the level of volatility in the currency markets, traders said.
According to the latest SEBI data, the total investments through P-Notes in the Indian markets — equity, debt and derivatives — stood at Rs 1.47 lakh crore at the end of June.
Direction to banks
The RBI wants banks authorised to deal in foreign exchange to determine whether FIIs have permission from such P-Note holders to invest in the currency markets.
In cases where it is difficult to obtain such permission, banks can also take a written undertaking from the FII that they have the mandate of the P-Note investor.
“If an FII wishes to enter into a hedge contract for the exposure relating to that part of the securities held by it against which it has issued any Participatory Note (P-Note), it must have a mandate from the P-Note holder for the purpose,” the RBI said.
This means that if an FII has sold a P-Note to an overseas investor, it cannot unilaterally hedge on the investor’s behalf.
“Generally FIIs are allowed to invest in bonds and Government securities on behalf of P-Note holders. However, some FIIs take positions in the currency markets on behalf of these investors, leading to speculation,” said N.S. Venkatesh, Chief General Manager and Head of Treasury, IDBI Bank.
However, experts believe that the rupee will continue to remain under pressure due to India’s high current account deficit.
satyanarayan.iyer@thehindu.co.in