Tour operators rush to book forward fx cover
The unrelenting appreciation of the rupee against the dollar is forcing tour operators to hedge their foreign currency earnings using forward covers. Profitability of the inbound business has been affected and the travel trade has turned cautious ...
By Neelakshi Rana & Vishakha Talreja, TNN |
NEW DELHI: The unrelenting appreciation of the rupee against the dollar is forcing tour operators to hedge their foreign currency earnings using forward covers. Profitability of the inbound business has been affected and the travel trade has turned cautious to avoid further erosion in bottom lines.
During January-October 2007, foreign exchange earnings from inbound tourism registered a steep growth of 25.6% in dollar terms compared to 12.7% during the corresponding period last year. In rupee terms, however, the growth in earnings was moderate at 16.2% compared to 16.5% in the corresponding period of 2006.
Experts said the number of tourists visiting India rose 20% this year, but revenue from the business has been affected due to weakening of the dollar. Realising that the rupee’s appreciation is unlikely to be reversed now, travel companies have started buying forward cover rather than merely resorting to billing in other currencies like euro or pound.
“The strong rupee has started hitting our bottom lines, and a further rally is bound to affect the inbound business.
We have already lost 3-4% on gross profit this year. Not just hotels, transport, guides and airlines, even entrance fees for ASI monuments is paid in rupees now,” said Le passage to India managing director Arjun Sharma. “For us, 40% of foreign exchange earning is in dollars and we cannot afford to speculate about currency movement to quote package costs. Now we have started buying forward cover. So far, our company has gone for a forward cover of 20% of our earnings from inbound tourism,” he added.
ADVERTISEMENT
Forward cover allows the buyer to convert his earnings to rupees at a specified rate rather than leaving it to market forces. Dollars are converted into rupees at a specified rate on a fixed date according to the contract. Cost of forward cover varies between 0.5-2.75% for a one-year period.“Smaller players are losing more than the bigger players. For players like us, rupee appreciation has been adjusted by an increase in margins, especially for niche packages. In the long run, the travel industry will be hit hard. More than the appreciation of the rupee, it’s the skyrocketing room rates that have impacted the industry,” said Thomas Cook MD Madhavan Menon. Thomas Cook is among the companies booking forward cover.
As inbound packages get dearer due to weaker dollar, travel industry feels growth in the number of inbound tourists would be affected if the current trend persists. “Tourists who have already booked their tours will travel, but will not spend as much as they would have on activities like shopping and entertainment. The weak dollar is bound to affect inbound travel, which has become less attractive,” said an industry representative.
Apart from rupee appreciation, higher pricing is also making India an expensive destination. Hotel tariffs in rupee terms have increased by a whopping 30% in one year, according to industry estimates.
Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
Bookmark or read stories offline -
Download ET Markets APP
Download ET Markets APP
ADVERTISEMENT
