A quick rebound after a sharp fall in the rupee has baffled the financial satraps of India Inc, now only taking a short-term view on hedging strategies. Having burnt their fingers in the second half of calendar year 2011 by taking longer term bets on the domestic currency, they’ve started hedging for smaller durations. Some are even leaving their foreign exchange exposures unhedged.
Rural Electrification Corporation (REC), which recently did a road show in Switzerland for raising $200 million and has hedged nearly 90 per cent of its foreign exchange exposure, now says the increasing volatility of the rupee has made them alter the hedging strategy.
“We are currently not looking to hedge the amount we will be getting through the Swiss bond, as the rupee is very volatile and the hedging cost is very high,” said HD Khunteta, finance director, REC. “We will look at an opportune time to hedge.”
Hedging allows insurance against future fluctuations in the rupee against the dollar and is done by buying dollars. It is measured with reference to the Mumbai Interbank Offer Rate (Mifor). The six-month Mifor rate is currently 7.75 per cent, against 2.2 per cent in August 2011. Hedging in a volatile environment can prove costly and lead to losses if the hedge is taken for a wrong value.
While market participants believe hedging is necessary to tide over currency fluctuations, a wrong long-term bet leaves little chance to reverse it. Also, guidelines released by Reserve Bank of India no longer allow cancellation and re-booking of the same contract in the forward market, which can lead to losses if an erroneous long-term view on the rupee is taken in a scenario of extreme volatility. Companies are mainly active in the forward or over the counter market.
“The rupee could again start correcting towards 50, as RBI (the central bank) has already begun relaxing the administrative measures around the rupee and concerns over Europe continue. It is not advisable to take more than a three-month view right now,” said Abhishek Goenka, chief executive officer (CEO), India Forex Advisors. Curbs on speculation by RBI in the forward market have impacted the hedging strategy of companies, as they are unable to take long dollar positions in the market like before, he added.
According to rating agency Crisil, foreign exchange losses incurred on account of rupee depreciation and spiralling borrowing abroad by top Indian companies are pegged at Rs 8,000 crore for the second half of 2011.
“The depreciation of the rupee against the dollar has resulted in foreign exchange losses worth Rs 4,800 crore in the July-September quarter for Nifty companies, wiping off close to eight per cent of their profit before tax. This represents one of the highest aggregate forex losses in a single quarter, given the sharp rupee depreciation and nearly threefold rise in foreign debt of these firms over the past five years,” said Prasad Koparkar, head, industry and customised research, Crisil Research.
Adding: “Crisil Research expects forex losses of these companies to remain high at Rs 3,500-4,000 crore in the October -December quarter.” The rupee fell 16 per cent in 2011 and has rebounded almost 7.1 per cent since the beginning of the year.
But, the perception is this rebound is not sustainable, as the euro zone issue remains unresolved.
Apart from the companies which raised funds abroad, the hedging tactics of others have also changed. Information technology companies such as Infosys are keeping only a six-month view on hedging as the rupee continues to oscillate. “We are not going beyond that time frame. In a volatile environment, it’s better to take a short-term view,” V Balakrishnan, chief financial officer of Infosys, had said after its third quarter results.
Tata Consultancy Services had hedged for a longer tenure and ended with wrong bets, incurring a Rs 91 crore hedging loss in the quarter ended September. Biocon is sticking to near-term strategy, in line with the market view. Mphasis, a software exporter, is also scaling down its forex cover.
The rise in hedging costs is also a deterrent for companies looking to cover themselves against currency fluctuations. Those who look to borrow abroad compare the costs of raising funds there and at home, with the hedging cost. Longer-term covers are more expensive and can be risky in a volatile scenario.
Hence, large infrastructure finance companies like Power Finance Corporation (PFC) are now asking the government to allow raising of short-term funds abroad, not permitted now. The average minimum tenor of a loan or bond for an infrastructure finance company is five years.
“We are asking for reduction in the tenor of external commercial borrowings, as costs for raising long-term funds overseas are very high,” said PFC Chairman and Managing Director Satnam Singh.
More, the new accounting method that allows forex losses to be adjusted in the value of the asset or amortised over the period of the loan, gives some leeway to companies to handle the mark-to-market losses incurred on the back of the rupee depreciation. This allows firms to delay their hedging plans and without impacting their earnings significantly for a few quarters.