BackTata Steel said to hedge risks to protect against rupee swings
Tata Steel is increasing its foreign exchange hedging to cover almost all its commodity imports for next 3 months
Premium
Mumbai: Tata Steel Ltd is increasing its foreign exchange hedging to cover almost all its commodity imports for the next three months to protect against rupee swings on concern elections this month won’t deliver a clear winner, people with direct knowledge of the matter said.
The overseas purchases to be covered by the contracts include coking coal that makes up as much as 80% of the Mumbai-based company’s $1 billion in annual inbound shipments, two people said, asking not to be identified because the information is private.
India’s biggest maker of the alloy is concerned that the elections ending in mid-May may produce a government without a clear mandate and reverse the best rally among the world’s largest economies, boosting import prices, they said. In the 2009 polls, the rupee jumped 6.4% in the month the results were declared.
“People are aware of the potential volatility that could come from the election results," Hamish Pepper, a foreign-exchange strategist at Barclays Plc in Singapore, said in a telephone interview. “There’s a market perception that a Bharatiya Janata Party (BJP) win could be good for corporates and inflows, but the outcome is uncertain, and the final verdict will give direction to the currency."
The main opposition BJP, led by Narendra Modi, is poised to win 209 of 543 seats up for grabs in the lower house of parliament, according to a March poll by ABP News television channel and Nielsen. The Congress party, in power for a decade, is headed for its worst-ever performance with 91 seats, the poll showed. Results will be announced on 16 May.
Volatility
The rupee has rebounded 15% from a record low reached on 28 August and last traded at 59.89 per dollar on 28 March in Mumbai, according to data compiled by Bloomberg. Three-month implied volatility climbed 92 basis points in March, the most this year, to 11.39%.
Tata Steel spokesman Kulvin Suri didn’t respond to three e-mails seeking comment on the company’s hedging plans. The two people familiar with the matter declined to specify at what level the company is hedging.
Tata Steel hedged about 60% its purchases a year ago, one of the people said.
Hedging costs
The cost of hedging foreign-exchange risk is increasing as options traders get more bearish on India’s currency. The price of contracts that fix the conversion rate for buying dollars with rupees in a month’s time has jumped 123 basis points to an annualized 9.25% over the spot rate from a five-month low in January, according to data compiled by Bloomberg.
One-month contracts offering the right to sell the rupee cost 81 basis points more than those to buy, the data show. The rate has doubled from a seven-month low touched in March. The so-called risk-reversal rate is still lower than last year’s peak of 5.5%.
Investor expectations a Modi-led government with a strong mandate may revive stalled infrastructure projects and reverse the slowest growth in almost a decade helped lift the BSE Sensex to a record in late March and the rupee to an eight-month high against the dollar.
In the 2004 general election, the Congress party unexpectedly won, triggering a slide that pushed the rupee toward its low for the year.
Biggest Risk
Tata Steel is seeking to protect itself from a surge in volatility such as the one in August when the three-month implied gauge of swings jumped to a five-year high after the current-account deficit widened to a record.
The biggest risk to the rupee’s rally would be a weak and indecisive coalition after the elections, Barclays’s Pepper said.
Tata Steel shares fell 1.1% to ₹ 389.50 as of 10:32am in Mumbai, paring gains in the past year to 24% versus the 19% advance in the benchmark Sensex.
Societe Generale SA recommends that investors protect themselves from election-outcome risks by purchasing two-month options to buy the dollar and sell the rupee.
“While markets are factoring in a positive outcome there’s a risk the polls won’t throw up a clear winner," Amit Agrawal, a strategist at Societe Generale in Bangalore, wrote in a March 24 note to clients. Bloomberg
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
