RBI allows QFIs to hedge currency risk of investments

The Reserve Bank today permitted individual overseas investors, also called Qualified Foreign Investors (QFIs), to hedge currency risk for their investments in equity or debt instruments.

"It has now been decided to allow QFIs to hedge their currency risk on account of their permissible investments (in equity and debt instruments)," the RBI said in a notification. Currency risk arises as QFIs are allowed to invest in rupee-denominated units of domestic mutual fund schemes and listed equity shares.

A QFI is an individual, group or association resident in a foreign country that is compliant with Financial Action Task Force (FATF) standards. QFIs do not include FIIs/sub accounts. As per the notification, QFIs have been allowed to hedge the currency risk on the market value of entire investment in equity or debt in India as on a particular date.

It has also allowed to hedge Initial Public Offers (IPO) related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism. As part of hedging mechanism, the QFIs are allowed to pick forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options.

Foreign Currency-INR swaps are allowed for IPO-related flows, it said. In order to attract foreign funds, the government recently allowed QFIs to invest up to USD 1 billion in corporate bond market and debt schemes of mutual funds without any lock-in period.

This limit shall be over and above USD 20 billion for FII investment in corporate debt. As of now, foreign investors were allowed to invest USD 20 billion in the country's corporate bond market. With this, the ceiling increased to USD 21 billion.

Gold hits 4-1/2 month high on Fed stimulus hopes

Gold rose to its highest since April in volatile trade on Friday on speculation of new U.S. stimulus after Federal Reserve Chairman Ben Bernanke said in a key speech that progress to bring down unemployment was too slow and the central bank would act as needed.

The metal fell immediately following the release of Bernanke's speech at the economic symposium in Jackson Hole, Wyoming as markets were disappointed over a lack of imminent stimulus. Investors had expected the Fed chief to send a strong message about a new round of bond-buyback known as quantitative easing (QE).

However, bullion quickly rebounded $30 per ounce, or almost 2 percent, f rom the low as markets later interpreted his comments as stimulus friendly. U.S. equities and commodities also reversed course to turn sharply higher as the dollar fell sharply after Bernanke's remarks.

"The main catalyst for the reversal in gold has been that Bernanke used the words 'grave concern' and the interpretation is that there's going to be more QE if he's using such dire projection for the economy," said Jeffrey Sica, chief investment officer of SICA Wealth Management, which has over $1 billion in assets.

"The stagnation of the labor market in particular is a grave concern...because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," Bernanke said in a prepared speech at the annual meeting of central bankers, finance ministers and economists.

Bernanke said it had to weigh the costs as well as the benefits of more monetary stimulus, although he hinted the costs may be worthwhile.

Spot gold was up 1.1 percent at $1,674.30 an ounce by 11:08 a.m. EDT (1508 GMT), rebounding from a low of $1,646.73 an ounce.

It climbed to a high of $1,677.80 an ounce, which marked the loftiest price since April 12.

U.S. COMEX gold futures for December delivery were up $19.90 an ounce at $1,677, with trading volume on track to finish at its highest level in a month, preliminary Reuters data showed.

Among other precious metals, silver jumped 2.2% to USD 31.08 an ounce. Platinum was up 1.5% at $1,523.99 an ounce, while palladium inched up 0.9% at $620.50 an ounce.