Firms getting more disciplined on currency hedging

Currency consultants are seeing some discipline in India’s companies when it comes to hedging, even as the rupee continues to remain stable and might remain so in the coming months.

While larger ones are well- hedged, smaller firms are preferring to enter into short- term hedging and rolling it over. Importers are willing to hedge in the one- month basket, and exporters, too, are selling dollars for the near future, say currency dealers.

This is a departure from the earlier practice of keeping foreign currency exposures largely un- hedged, inviting criticism from the Reserve Bank of India ( RBI) stating that the central bank wouldn’t be available to protect these firms if currency volatility tosses the currency bets upside down. Unsure of whether the repeated warnings would work, the central bank directed banks that the lenders have to set aside more money for their clients un- hedged exposures. This indirect pressure tactics worked, as capital- deficient banks tightened their purse strings from lending to undisciplined firms.

But, that induced another positive habit in the firms. They made hedging as part of their daily operation. The result, currency consultants say, is that large firms are almost always fully covered.

But smaller firms, for whom long- term hedging cost is still a sizeable component, are only protecting their immediate needs and not necessarily the long- term requirements.

The hedging cover for Indian companies improved to 39 per cent of total foreign currency exposure in the year ended March 31, 2015, from 15 per cent in the previous year, RBI deputy governor HR Khan had said. As on June 30, 2015, the ratio improved further to 41 per cent. The recent data for the hedge ratio is not available, but currency consultants are indeed seeing an improvement in hedging.

“Hedging as a discipline has improved among companies. Large firms are careful about their foreign currency exposures, but smaller firms are covering for 15 days to one month,” said Abhishek Goenka, head of IFA Global, a currency consultancy firm.

Goenka said exporters have also started selling dollars in the forwards market as the impression is that rupee won’t depreciate much from the present levels. At the same time, the currency is unlikely to appreciate to benefit the importers remaining un- hedged. “There is decent hedging activities by Indian importers as they are not expecting too much of rupee appreciation from current levels. However, there is no panic in the market,” said Samir Lodha, managing director of QuantArt, a hedge advisory and risk management firm.

Business Standard New Delhi,05th May 2016