Forex Markets Forex Risk Management

Hedging INR currency risk – tips for international investors/borrowers

International investors who have exposure to Indian assets have various avenues to hedge the currency risk inherent in the asset. As a first level choice, one can hedge the risk either in the onshore market or the NDF market. Here we explore the two avenues and the circumstances which make one better than the other.

From a regulatory perspective, an investor in Indian assets have to register as an FPI or FDI investor. FPI (portfolio investment) investors are those who invest in liquid equity and debt investments and have a shorter time horizon than FDI (direct investment) investors who invest in subsidiaries, joint ventures, private equity and venture capital kind of assets. There are other types of investors who take indirect exposure into India through structured notes linked to Indian bonds, or those who lent to Indian entities using masala bonds (INR denominated bonds).

The regulatory framework around INR currency risk hedging provides different hedging facilities to these different sets of investors. Below is a brief summary

  • FDI investors can use forward contracts and plain vanilla options to hedge INR currency risk. Both the value of investments and any dividend cash flows out of India can be hedged. Critical point though is that these contracts can be rolled over at maturity and cannot be canceled and rebooked.
  • FPI investors also can use forwards and plain vanilla options in the OTC market to hedge the risk arising out of the market value of their INR investments and also any coupon/dividend to be repatriated. In addition to the OTC markets, FPI investors can use the currency derivative segment of exchanges to hedge their currency risk. Up to 100 million positions can be taken by FPIs without a need to prove underlying exposure. Any position beyond 100 million needs to be backed by underlying exposure

USDINR Hedging: NDF vs Onshore

The onshore market provides forward contracts, option contracts and swap contracts (using MIFOR curve) for hedging the currency risk up to 10-year maturity. NDF market in INR also can provide all these hedge instruments ( based on the NDCCS curve) and can even provide bespoke hedges using exotic option structures (barriers, digitals and other exotics).

Parameter Onshore NDF
  • Optimisation of risk return is difficult. Less flexibility in hedging as dynamic hedge ratio management is not possible
  • Option structures such as call spreads not permitted
  • Dynamic hedge ratio management is possible as there are no restrictions on cancellation and rebooking. Risk return optimisation is more achievable
  • Free to use any hedge structure
  • Liquid market up to 10 years. Notionals of 100 million can easily be cleared
  • Lesser liquidity, especially for long tenors. Can adopt short tenor hedges and rollovers
  • More liquid and smaller bid/offers.
  • Forward premium can be higher or lower than NDF
  • Bid/offers tend to be larger than onshore, especially for long tenors.


If the objective of risk management is to optimize the risk and return, a dynamic management strategy or a static strategy with option structures is desirable. In such cases, NDF hedging might suit foreign investors. Structures such as call spread which provide protection in a range of currency rates can be used in consonance with dynamic management of hedge ratio to generate cost savings to the extent of 2% vis-à-vis a full hedge scenario.

In cases where the need of hedging is to freeze the hedge rate and not to optimize on hedge cost, onshore hedging using forwards or plain vanilla options is suitable. Of course, even in onshore hedging, within the permitted product suite, one can use some dynamism using rollovers to generate cost savings.

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