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India,Nepal,United States : NEPAL: Central Bank directs banks to stop hedging of US Dollar via NDF Contracts.

Banks hedging of the US dollar via non-deliverable forward (NDF) contracts with global banks may stop soon, because of the recent directive of the Nepal Rastra Bank (NRB).

The NRB has asked the bankers to stop the NDF contract for the time being.

The NDF, a hedging system, is deployed by the international banks to hedge the exchange rate of the US dollar in Nepali banks, in turn rescuing these lenders in Nepal from losses as a result of instable exchange rates. Since the system does not require physical delivery of the hedged dollar, which is only removed from the account of Nepali banks, it is known as non-deliverable forward contract .

Banks have executed NDF contracts to mitigate exchange rate risks in view of the exchange rate s volatility in recent times .

During hedging, the US dollar s exchange rate is maintained against the Indian Currency, which facilitates measurement of Nepali currency (NC). According to the bankers, the NC lacks global recognition and thus the dollar s exchange rate with the IC is referred.

During the hedging procedure under the NDF, the global banks provide certain exchange rates of the US dollar to Nepali banks. In the event of changes in the exchange rate on the market on the last date of hedging, the difference is settled by Nepali and global banks via payment of the amount of difference to the organization in arrears.

To be precise, global banks offering of IRs 65.20 for each US dollar for hedging purposes as against the market exchange rate of IRs 65 for each US dollar, will be gainful for Nepali banks.

If the exchange rate becomes IRs 65.80 for each US dollar on the settlement day, then the global banks have to pay the Nepali bank the difference amount (60 paisa) in the US dollar equivalency. But, Nepali banks have to pay (30 paisa) to the international bank that hedges if the rate declines (for example IRs 64.90).

An official of a major commercial bank stated, Usually, we take the exchange rate set by the Reserve Bank of India (RBI) on the settlement day to settle the difference between the hedged rate and the market rate.

Since the government gets involved only thrice-weekly, it is a key device for the bankers, according to them.

Banks are also not allowed to do NDF contracts in India in line with the RBI direction.

The Chief of Treasury Department at the Himalayan Bank Limited (HBL) - Gyanendra Sharestha, We can be confident in offering better exchange rates to migrant workers if there are hedging opportunities. Otherwise, they go for hundi (an informal channel), and if we fail to offer a better exchange rate than hundi operators it is not good for the economy.

The Foreign Exchange Dealers Association of Nepal (FEDAN) has requested the NRB to refrain from disallowing the NDF. The FEDAN President stated, We requested the NRB to allow us to continue NDF deals, as it is not harmful.

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Publication:Mena Report
Geographic Code:9NEPA
Date:Sep 12, 2013
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