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Understanding India’s Currency Hedging Facility

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Foreign debt can increase the amount of capital available for renewable energy and provide a cheaper source of capital.

A currency hedge – a strategy to reduce risks in the foreign exchange market – is often needed to protect against the risk of currency devaluation. When there is a mismatch between financing currency (foreign) and revenue currency (domestic) in a renewable energy project. The high cost or lack of hedging facilities for some currencies poses a barrier to mobilising foreign capital for investment in renewable energy. 

To address this challenge, the Indian government has been experimenting with different concepts, such as a currency hedge fund or a currency risk guarantee. The government is also working closely with the India Innovation Lab for Green Finance to develop a currency hedging facility to cover the dišerence in exchange values between the Indian Rupee and hard currencies (e.g., USD or euros) over the long term. The Lab is a public-private initiative that aims to seek out and help implement novel solutions for unlocking and scaling up investments in green infrastructure in India. 

In October 2016, the Lab members endorsed the design of a customisable currency hedging product, which involves a foreign exchange (FX) hedging facility backed by a risk guarantee. This “FX Hedging Facility” aims to reduce the cost of currency hedging by targeting a particular tranche of currency risk, thereby allowing risks to be allocated to suitable parties and eliminating the credit risk premium (The Lab, 2016a). With strong support and endorsement from the Lab’s members, including the Ministry of Finance and Ministry of New and Renewable Energy, the facility is moving forward on pilot projects with key financing stakeholders (The Lab, 2016b).

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