Rupee depreciation coupled with the volatility in global markets and policy paralysis in Indian government, have all had an effect on the investment made by the Qualified Foreign Investors. The fear of not making the desired returns on the investment due to currency conversion, has kept QFI’s on the edge and the investments have been very low in comparison to the expectations of the Indian government. According to sources despite the launch of this category of investors in January, till date only 37 crores have been invested by QFI in Equities.

To counter the biggest fear of QFI’s the Reserve bank of India has done its bit by allowing QFI’s to hedge the currency conversion risk by use of forward foreign exchange contracts and Indian Rupee swaps. QFI’s can now hedge the currency risk by use of contracts that have Indian Rupee as one of the currency.

Investors can now hedge the entire value of their investments in equities and debt on a particular date by use of forward contracts. If market conditions bring down the value of the portfolio and, subsequently the hedge proves futile, then it may be allowed to continue till it was originally scheduled to expire. The contracts once cancelled cannot be rebooked.

In case of Initial Public Offer (IPO) the Reserve Bank of India has allowed capital flow under the ASBA (applications supported by blocked amount). Under this mode the funds leave the investors account only when the shares are issued to them. The investor can use swap option to cover his currency conversion risk. The maximum tenure of the swap is restricted to 30 days. Contracts can neither be rebooked after cancellation nor rolled over.

Hopefully this should take care of the fear of loss in capital due to currency conversion for the QFI’s and the investments will increase.