RBI must intervene and bring the rupee down to Rs 55 is the sound of every corner of the corporate houses. It is erroneous to wait for a Central Bank to intervene. One should have well-developed-articulated management policy that whenever the exposure to foreign currency crosses a particular boundary then the corporate should restraint operations and acquire cover.
Corporate are citing past bitter experiences in not using hedging methodologies to salvage the losses. Exporters used to do hedge their positions in but gave up after they burnt their hands in 2008. People are shying away from hedging because of volatility. However, this may not be the right approach to adopt, as volatility is likely to continue in the rupee vs. dollar space. Volatility hurts any corporate. If the appreciation or depreciation in the currency is in a gradual manner one can adapt accordingly. However, sudden appreciation too hurts, just like rapid depreciation.
Actions you can take:
Hedging of risk
The risk that your business is likely to run into in unfavourable currency scenarios can be mitigated by means of hedging. However, Indian businesses, which have foreign currency exposure, have failed to use hedging and hence twig the damage done by the rupee fall.
According to data from Crisil Research, Forex debt stands at $210 billion in the year ended March and the books were only partially hedged. Around 45% of the total debt was short-term and due within a year. Moreover, only half their Forex exposure is hedged.
Methodical hedging is essential for businesses where foreign exchange rate plays a vital role. Considering the volatility, they can look at a plain vanilla call option or a call spread to cover forwards.
One can use Forward Contracts to hedge, wherein you can convert a set amount from one currency to another at a rate and date that are pre-decided. In the Indian Currency futures markets, the liquidity is good for contracts between 1 and 3 months, but not beyond that.
Another protection is using Call and Put options. Under the Call option you can – but needn’t necessarily buy a currency – at a pre-selected rate and a date that is determined earlier. Under the Put option you can sell a particular currency at a certain price and date, but needn’t sell it if the situation doesn’t turn out the way you had anticipated.
Companies can use Option-based products. They can keep their exposure open and put in a limit after which they take up cover. Say for instance if a businessman thinks the rupee will depreciate to 59 against a dollar, but if he finds that his views have gone wrong then he should do appropriate hedging.
Take a foreign currency loan / raise money abroad
Presently dollar loans are being taken up by importers to pay up the dues. These would come in handy and cheaper until the currency situation stabilizes. External Commercial Borrowing route is being used by companies, but they are taking Dollar loans at 2% and looking at delaying payments through buyer’s credit. However, do not delay your decision further. If you would like to take dollar loans then you would have to take it before the rupee starts appreciating. By drawing, a dollar loan now you would be adopting a good hedging policy as there would still be an arbitrage of 3-4%.
Diversify the currency risk
If you have been importing from a single nation or receive income in one foreign currency alone, then it is time to explore multiple countries on your business map. This helps as all currencies do not move in tandem.
The level you should be eyeing
However, before you hedge your positions or sit on the deal table with clients, you should be able to take a call on where the currency is headed. The rupee deserves to be in a stronger situation given the economic scenario, the GDP is better. Our debt has reduced leading to a better fiscal deficit standpoint. The US is getting to be in a stronger health and so our exports to US are better placed.
The worst is behind us now
Experts foresee the rupee going to a level of 58 (against the dollar) in a couple of weeks as the exporters are going sell their dollars. Overall, the dollar is still looking strong. Companies should be looking to cover up loans keeping in mind the Rs 57-58 level.
But Nomura Research’s special report titled “India: Turbulent times ahead”, sees near-term upside risks to USD/INR continue on Fed tapering concerns, high levels of foreign equity positioning, concerns over external debt obligations and China slowdown risks. As we approach year-end, the global growth recovery should lead USD/INR gradually lower.
But remember that volatility will be a rule of the game unless RBI follows up the recent measures with further actions. The RBI has acted decisively, and this will likely prompt a rebound in the INR in the short term. However, a sustained tightening of domestic liquidity conditions is a rather indirect way of calming FX markets. It is important that the technical steps to calm the FX market in the short term are reinforced by structural medium-term measures to improve India’s external trading performance. Only this will allow the authorities to reduce volatility across financial markets as a whole.
If you have any query contact me at tirtha.ray@gmail.com
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