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Business News/ Market / Stock-market-news/  Rupee’s slump worries firms with unhedged forex exposure
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Rupee’s slump worries firms with unhedged forex exposure

Forex consultants say companies are getting worried and actively looking at the RBI to support the currency and not allow a repeat of 2013

The relative stability of the currency for the most part of 2014 dissuaded most companies from spending on hedging, which remained at about 8% for most of 2014. Photo: Pradeep Gaur/MintPremium
The relative stability of the currency for the most part of 2014 dissuaded most companies from spending on hedging, which remained at about 8% for most of 2014. Photo: Pradeep Gaur/Mint

Mumbai: The rupee’s sudden slump has stoked anxiety among Indian companies, which have left much of their foreign currency exposure unhedged because of the local unit’s relative stability this year and the high cost of hedging.

While the rupee’s current level may not pose a significant risk to local companies, the situation may worsen if it slides to 65 to a dollar for firms that have unhedged exposure, currency consultants say.

The rupee fell to a more than 13-month low of 63.89 to a dollar on Wednesday, even though it recovered to close at 63.62 after the Reserve Bank of India (RBI) reportedly sold dollars through state-run banks.

Companies, however, maintain that they are comfortable and do not plan to reverse their current hedging policy in response to the recent volatility.

The hedge ratio for external commercial borrowings and foreign currency convertible bonds came down from 35% in 2013-14 to just 15% in July-August, RBI deputy governor H.R. Khan said in a 4 October speech. In subsequent public comments, central bank officials, including governor Raghuram Rajan, have warned companies that they should not expect RBI to bail them out.

Hedging is done by buying dollar futures, paying a premium over the spot exchange rate. The relative stability of the currency for the most part of 2014 dissuaded most companies from spending on hedging, which remained at about 8% for most of 2014.

Nerves are now getting a little jangled. Forex consultants say companies are getting worried and actively looking at the central bank to support the currency and not allow a repeat of 2013, when it hit a record low of 68.85 to a dollar on fears of a tapering in the US Federal Reserve’s quantitative easing programme.

One-month implied volatility, which is used to price options, shot up 3 percentage points to 8.515% on Wednesday, up from 5.525% on 12 December, reflecting the rupee’s sharp movements in the past few days.

“If the currency moves some 2 in a quarter, some of them will surely feel jittery," said Jamal Mecklai, head of Mecklai Financial Services Ltd. “I am not surprised. The rupee was overvalued and now it could be correcting."

RBI and banks don’t regularly release the ratio of hedged and unhedged exposures. Based on anecdotal reports and records of their clients, currency consultants estimate that not more than 20-30% of the foreign currency exposure of their clients would be hedged.

One reason for this has been the expectation that the RBI would support the rupee in the 60-62 to the dollar range. But going by the recent comments from the RBI governor, currency consultants say this may not be the case.

“... lots of forces will determine the fundamental value of the rupee. Our objective is not to stand in the way of those forces. All the RBI’s exchange rate policy historically and today has been is that we will prevent undue volatility in the rupee and so I don’t think anybody should therefore assume that it is okay not to hedge exposures and that RBI will bail them out," said Rajan in a briefing after the 30 September monetary policy review.

“There is no panic yet, but now that the range (rupee being at 60-62) has been broken, there’s certainly a fear," said Samir Lodha, head of QuantArt Market Solutions Pvt. Ltd, a risk advisory.

Risks are more pronounced for payments that are due in December, according to Lodha.

For example, the rupee ended at 61.75 a dollar at the end of September. At the time, the cost to hedge up to December was 90 paise. So, a corporate could have hedged his entire exposure at 62.60 a dollar until December. If he didn’t, he now has to pay between 64-65 a dollar.

Lodha says this consideration is pushing some companies to increase hedging for the short term. Mecklai, however, said some of his clients are still waiting, expecting the rupee to strengthen.

To be sure, some do expect rupee to scale back.

Harihar Krishnamoorthy, head of treasury at First Rand Bank, expects exporters, who sell dollars in the market, to hedge their exposures at the spot price, expecting the rupee to strengthen. Importers, he said, are buying whenever the currency gains a bit.

“There is no fundamental reason why rupee should fall rapidly," Krishnamurthy. “It is all due to global risk-aversion for now."

Bank of America Merrill Lynch expects rupee to strengthen to 62 a dollar by March.

However, foreign investors who hedge in the offshore market do not see the rupee recovering, at least over the next three months. The three-month forward rupee-dollar rate is 64.75 a dollar, indicating further fall.

However, some companies said they are much better prepared now than last year. But full hedging is not possible, they said.

T.K. Sridhar, head of investor relations and country controller, ABB India Ltd, a capital goods company, said that the firm follows a global hedging policy, and has a hedge in place for every forex exposure.

Indian firms are better positioned to absorb any volatility in the rupee than they were in 2013, said Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel Ltd. “It is quite safe now and Indian corporates are quite cautious. In the past, most books were unhedged. At present, the hedging cost is around 7-7.5% and if a company is raising foreign currency loan at 3-4%, its cost will come around 11-12%. The rupee volatility will start hitting the corporates only when the hedging costs goes up beyond a point," Rao said. ​

Godrej Consumer Products Ltd actively covers its exposures, which are at minimal levels, said P. Ganesh, executive vice-president, finance and commercial, and company secretary.

However, for cement companies who import coal, the slide in the rupee may translate into higher costs.

Although Shree Cement Ltd fully hedges all the capital and machinery costs, other costs are unhedged, according to managing director H.M. Bangur.

“But we do not hedge our coal import costs, since the booking time and delivery time has some lag," he said. The cement manufacturer will not consider short-term hedging as an option as yet, Bangur said.

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Published: 18 Dec 2014, 12:28 AM IST
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