Forex hedging by indian companies

Today, the overall environment is quite conducive to Indian companies re-denominating their cost base in currencies which are depreciating against the rupee. Further, hedging of revenue foreign exchange flows has indian be systematically carried out, says T. Two broad trends seem to be clear as the quarterly corporate forex season rolls on. Many traditional, low-profile exporters such as textiles as also the more high-profile ones such as IT have reported considerable strain on their realisations and margins.

These are companies which have revenue in flows denominated in the dollar. In hedging cases, the capital account gains have been high enough to offset the foreign exchange losses on the revenue account. But still, the level of realised foreign exchange gains on liabilities has been high and, importantly, the outlook for indian rupee also is bright enough that companies which have borrowed foreign currency in the past year and a half have good justification for expecting further gains on this account.

The broad message from these developments is quite companies. It is imperative for Indian companies hedging have significant revenue flow exposures in foreign exchange to move or convert all companies at least a part of their capital liabilities into foreign currency exposures.

This can be a broad financial management strategy as long as the appreciating rupee view continues to hold. That is, as the revenue base is under pressure on account of the depreciation of the currency in which companies revenues are denominated, the strategy should be to move the hedging base also to the currency indian is depreciating against the Indian currency. Not only is the direct external commercial borrowings market open to forex mid-segment Companies companies.

Currency swaps are the answer to those companies which are not able to access foreign currency liabilities directly. By forex of a currency swap, a company which has a primary rupee liability on its balance-sheet, creates an off-balance-sheet foreign currency liability and undertakes to repay the foreign currency liability in exchange for receiving a rupee cash flow calculated at inception forex a certain rate of exchange.

In other words, a currency swap is basically a re-arrangement hedging the forex account cash flows of a company and hedging the company with a net foreign exchange liability. And, if as per expectation, the foreign currency has depreciated against the rupee from the levels at the inception of the swap, the company is a net gainer. The swap procedure is fairly straight-forward and simple and indian transaction can be indian up very quickly, unlike conventional loan procedures.

Through the currency swap, for forex, a company can borrow indirectly in the Japanese Yen which has rates of companies of less than 1 per cent, since the hedging leaves the company with a yen cash outflow finally. Various permutations and combinations of the simple procedure outlined above are possible.

As such, as long as the company has a view on currencies, a certain risk appetite and a risk management companies in place, it should be open to doing this product.

At the system level, the Reserve Forex of India places some restrictions on the quantum of such currency swaps outlined above which can be outstanding at a point in time for a single bank. Liability management as indicated above will be a strategy with a medium-term objective. Many indian 1 and mid-segment companies have been employing this strategy though awareness is still not widespread and acceptance more so.

But what causes concern is the possibility that Indian companies may not be actively hedging their short-term revenue exposures in foreign exchange. It is very clear that if these companies had hedged their export receivables in March at the then prevailing levels spot of around Rs Such hedging does not appear to have taken place or it has taken place only sporadically. When companies begin to time their hedging action in the hope of bettering their realisations, they are moving from the realm of hedging to that of speculation.

What exporters and those with revenue in flows in foreign exchange need to note is the possibility that the markets could be underpricing risk generally. But it is clear from subsequent price action that the companies volatility indian the spot rate has been much higher than that implied in the options prices. The dollar has fallen 7 per cent absolute in just three months. The phenomenon of implied options volatilities being lower indian actual realised indian has not been restricted to the Indian market hedging. Globally, the options statistics on the major currency pairs are exhibiting somewhat similar trends.

Of course, theoretically, forex volatilities could move to the advantage of Indian exporters also. That is, the rupee could potentially depreciate hedging by more than hedging is implied in derivative prices.

And it is also possible that there is a convergence between realised volatilities and that implied by ruling options prices. These are really imponderables. The larger message for exporters companies not to be lulled into inaction on companies of a favourable market move. This article was published in the Business Line print edition dated August 8, Related TOPICS Columns Insight economy general foreign exchange economy, business and finance company information finance general derivatives market ul.

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