During the financial year 2004, the Indian companies raising resources through external commercial borrowings and importers, kept foreign currency positions unhedged in the wake of excess supply conditions and drop in forward premiums, RBI said in the report on 'Trends and Progress in Banking', released in Mumbai.

An appreciation of rupee against the US dollar, coupled with soft global interest rates, has resulted in the increasing recourse to ECBs, RBI said.

However, in the current scenario of hardening of overseas interest rates, the corporate balance sheets may be affected, rendering the banking sector vulnerable to credit risk due to unhedged exposure of clients, it said. Banks should obtain information about unhedged positions to assess risks to their own exposure to corporates, it said.

On the challenge of managing forex reserve inflows, the central bank said the accumulation of forex reserves remained a matter of concern for monetary and exchange rate management but operationalisation of market stabilisation scheme has helped to manage liquidity.

The financial markets had witnessed easy liquidity conditions with inflows, and excess supply conditions put upward pressure on Indian rupee, which pushed down the forward premium, RBI added.