Re's Sudden Fall may Push Cos to Hedge Currency





The sudden fall in the Indian rupee has woken up many corporates to the ground realities of the currency market. After six months of stability, complacency had set in. Indian corporates, after remaining unhedged, may now start covering their currency exposure.

Some companies tend to stay away from hedging as its cost eats into the net receivables.

"Sustained RBI purchases of dollars, uncertain geopolitics and the prospects of early withdrawal of the monetary accommodation in the US do appear as risks to the rupee," said Ananth Narayan, regional head of financial markets, South Asia, Standard Chartered Bank. "In such a context, Indian importers would be well advised to seek option protection as insurance against any shock moves in the local currency ."

Between May 22 and August 14, the Indian rupee dropped about 4% to close at 60.77 per US dollar on August 14 from 58.46 on May 22. It had risen 5.60% till May 22 since the beginning of the year. Strong Reserve Bank of India intervention in mopping up dollar inflows has prevented the rupee's significant appreciation, as any sharp rise in the local unit would hurt exporters.

According to the latest data, the central bank has bought a net $2.4 billion collective ly in May and June compared with $2.3 bil lion sold in the year-earlier period when the rupee was falling against the greenback. In the last few weeks, the dollar has been strengthening as investors seek the safety of the US currency on the back of tensions in Iraq, Ukraine and Gaza that could also hurt crude oil prices.

Moreover, improving economic fundamen tals in the US are attracting investors with their eye on a possible interest rate increase. This too has helped in arresting the rupee's rise.

"Despite all, the local unit has clearly out performed when compared with other cur rencies like in Brazil, Russia or Korea," said NS Venkatesh, executive director at IDBI Bank. "Both exporters and importers should hedge their currency exposures as and when they get the right opportunity at a reasonable price.Chances of rupee appreciation are higher than its depreciation."

The one-year forward rupee-dollar forward rate is currently quoting at about 8.20% or a premium of about ` . 4.90 over the spot market. In the current perspective, it looks attractive for exporters to take positions at these levels with the expectation of more overseas inflows in the coming days. However, it's still a bit expensive for importers, who may be considering their options, dealers said.

"Volatility is likely to increase in the domestic currency market," said Pramit Brahmbhatt, CEO, Veracity Financial Services. "While foreign inflows are likely to increase further in 2014-15, external factors may strengthen the dollar against other currencies."

According to Narayan, going forward, domestic factors look much more favourable than 12 months ago.

Foreign exchange reserves have improved significantly by about $4 billion to $319 billion on August 8 since May 16 this year. The prospects for a growth revival look good given the positive indicators and that the government is looking to boost the economy.

"Given improved India fundamentals and steep forward premia, exporters continue to see merit in increasing hedge ratios, despite lack of rupee appreciation," Narayan said.