India's finance ministry has asked state-run banks to make hedging compulsory for all importers seeking foreign letters of credit (L/Cs) for their purchases.

The move is expected to stoke inflation because it will increase the cost of imports since borrowers will have to pay to hedge their foreign exchange exposures.

Excessive exposure

The Indian government says that compulsory hedging is necessary to check what it describes as the excessive exposure of some state-run banks to importers.

India's largest bank, State Bank of India, has disclosed to officials that its outstanding foreign L/Cs as of 30 June 2013 totalled US$18.5 billion.

Trade deficit

Bankers however have told local media that they suspect the government's real motive is to dampen imports.

India is grappling with a widening trade gap, which stretched to US$ 191.6 billion in the 2012-13 financial year as exports fell 1.8% while imports grew 0.44%, thus creating India's highest ever current account deficit.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.