Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Stock-market-news/  Companies warm up to hedging after volatile currency takes toll
BackBack

Companies warm up to hedging after volatile currency takes toll

In the last few months, there has been a rise in small- and mid-size firms seeking to hedge their forex exposures

The rupee has been under pressure because of high CAD and falling foreign dollar inflows. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
The rupee has been under pressure because of high CAD and falling foreign dollar inflows. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

Mumbai: Hit by the recent volatility in the rupee, many small- and mid-size companies in India are rushing to hedge their foreign currency risk.

These companies are in businesses in which exports and imports form a significant part of revenues and payments, such as textiles, shipping, and oil and gas. Hedging has become a necessity for these companies that are deeply impacted by the uncertainty in the forex market.

“Hedging helps us add certainty in our business," said the chief financial officer of a Mumbai-based petroleum company. “We have now decided that we will be hedging at least 50% of our exposure, which is much higher than what we used to do earlier," he said on condition of anonymity.

In the last couple of months, there has been an increase in small- and mid-size companies seeking to hedge their forex exposures because they have been hit hard when the rupee went below 68 to a dollar on, said Arvind Narayanan, executive director and head sales, treasury and markets, DBS Bank India.

“They have become more open to forwards and options to hedge their forex exposures now when the rupee is back to 61 level," Narayanan said. “These companies are approaching us to see how they can avoid big losses."

The Indian currency has been under pressure because of the country’s high current account deficit (CAD) and declining foreign dollar inflows this fiscal year that began on 1 April. The CAD in the three months ended June widened to 4.9% of gross domestic product as exports slowed and imports of commodities such as gold rose sharply.

Foreign investors pulled out $3.7 billion from the country’s equity market between June and August. However, such inflows have since returned, with investors buying $2.11 billion worth of shares in the past one month.

The impact of dollar inflows is being clearly seen on the rupee, with the Indian currency rebounding from an all-time low of 68.85 per dollar on 28 August to 61.94 per dollar on Wednesday.

The 11.15% rise in the Indian currency in that period has been the sharpest among all Asian currencies. However, so far this fiscal year, the rupee continues to be a loser, falling 12.38% against the dollar from 54.27 a dollar on 1 April to Wednesday’s close of 61.94. Only the Indonesian rupiah has lost more, falling around 13.14% against the dollar in that period.

Indian importers are still buying forward dollars in the market, which is a sign that they are hedging their exposure at every level, said Harihar Krishnamoorthy, treasurer, FirstRand Bank India.

“Clearly, there was some panic when the rupee hit 68 per dollar. Importers are coming in to buy forward dollars to hedge in case the rupee falls again. Exporters have not yet been seen selling dollars in the market, which could be because they are waiting for a better level," said Krishnamoorthy. “But there is an increased interest in hedging, especially in the shorter three-month to six-month tenures."

The one-month forward dollar is currently trading at 62.48, while three-month forward dollars can be bought at 63.50, higher than 61.94, the closing rate of the currency on Wednesday.

Some companies “almost got killed" when the rupee fell to 68.85 per dollar, forcing them to look for alternatives to hedge their risk, said Ananth Narayan, co-head, wholesale bank, South Asia, Standard Chartered Plc.

“Many companies had taken external commercial borrowings when the rupee was at 45 or 50 at the most. The sharp fall in the currency had raised serious questions about the risk management followed by these companies," Narayan said. “Earlier, companies used to want to have the flexibility on whether they will hedge their exposure or not but now there is a lot of awareness and banks are also pushing customers because it’s the correct thing to do."

Bankers say the high cost of hedging is the biggest deterrent these companies face while deciding on hedging.

“The cost of one year forward dollars, for example, is more than 5 above the spot rate which is expensive.," Narayan said.

One-year forward dollar to rupee closed at 66.87 on Wednesday, much higher than the 61.94 a dollar spot rate. Even six-month forward dollars are available at a premium at 64.74 per dollar, Bloomberg data show.

However, bankers say companies are realizing paying a premium now is better than risk-erosion on their net worth due to the volatility of the currency.

“All said and done, the rupee is still under pressure because India’s fundamentals remain weak," Narayanan of DBS said. “The currency is likely to weaken from the current levels in the next few months and the current forward rates may then appear cheaper."

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!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 09 Oct 2013, 11:29 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App