Corporates rejig hedging strategy as rupee weakens

MUMBAI: After having bet on a strong rupee since the last few years, corporates have reversed their view and are preparing for the rupee to weaken against the dollar.

Many players, including a host of IT companies, have started offloading their forward positions as the rupee has started weakening. Importers too have started covering their short-term foreign currency needs.

Exporters began hedging their positions since early May when the rupee breached the 45 mark against the greenback. In the third week of July, the Indian currency crossed 47 levels vis-a-vis the dollar.

Over the past two weeks, while short term (one-three months) forward premia have almost doubled, the yields on the six-month and one-year premia have remained largely range-bound. On Wednesday, the yield on one-month premia was at 0.98%, while that on three-month premia crossed 1%.

Corporates deploy hedging as a means to cover their open positions in foreign currency assets. Bankers state that the weakening rupee has caused exporters to pare their hedge ratio from around 80% of their exposures to less than 30% since early May.

When the rupee strengthened against the dollar to around 44.50 in February, many exporters were hedging their forwards. However, the recent weakening of the local currency has caught them on the wrong foot, said Harihar Krishnamurthy, head- treasury at Development Credit Bank.

Treasury officials said that while recent dollar supplies came from a couple of the large software companies and a petrochemical behemoth, the demand was from public sector oil companies, due to rising crude prices. A senior banker pointed out that it has been a combination of hedging and trading for most corporates, even by mid-sized diamond exporters.

“There is a demand-supply mismatch in the market. Corporates had sold aggressively some time back on an appreciating rupee. The rise in the dollar-rupee has caught the markets by surprise. There is limited appetite among exporters to hedge more till they see more clarity on the rupee view. Importers on the trade account have started buying in the near end, while on the capital account, there is limited buying to hedge long-term liabilities,” says Hemant Mishr, head, global market sales, south Asia, StanChart. A senior foreign bank official said the market is seeing more of exporters cancelling their futures, than importers covering their futures.

According to Mehul Choksi, chairman, Gitanjali Group, “We have a non-risk portfolio and are not looking at speculating on the rupee. There is a fair bit of concern that the rupee will depreciate.” On the receivables side, he added, “Whatever open positions we have, we will keep them uncovered.”

Interestingly, following the market crash, research reports published by banks have have toned down their rupee views from being less bullish to even more bearish stances. Though the long-term view is that the rupee will appreciate, there seems to be a lack of consensus for the near-term view.

So, while JP Morgan views the dollar-rupee exchange rate to be at 47.50 by December and expect it to touch 48 by March ’07, StanChart’s view for the end of the year is at 45.50— as the bank feels that dollar will weaken internationally. Deutsche Bank foresees the rupee to reach 46.70 levels by December ’06 and touch a level of 47 against the dollar by July ’07.

Points out Sanjeev Bafna, joint president and deputy CFO, Grasim Industries, “The current volatility in rupee is because of the stock market volatility and also increasing oil prices. The long-term view is that the rupee will appreciate.”

N Subramaniam, a forex advisor with Basix Forex and Financial Solutions said, “Currently, the market seems to be regaining its balance. Internationally, most players are bracing in for a weaker dollar as the US economy is expected to slow down in its growth pace.”