MTM losses expected to surge

The rupee’s depreciation of 9.72 per cent against dollar in the third quarter is expected to increase India Inc’s mark-to-market (MTM) losses on foreign currency loans by Rs 15,000 crore in the quarter ended December 2011.

This is in line with the quarter ended September 2011 when the rupee lost 9.74 per cent against the dollar and 294 companies had to set aside Rs 15,000 crore to account for currency fluctuations, derivative losses and mark-to-market (MTM) losses on foreign currency loans.

The MTM loss could be much higher if all companies provide for such losses. Companies with significant foreign borrowing carry such losses in the balance sheet.

For example, Reliance Communication is permitted to adjust variations on account of changes in foreign exchange rates to profit and loss account by a corresponding withdrawal from general reserve.

During the quarter ended September, the company set aside a variation of Rs 2,714 crore from the reserve.

A Business Standard Research Bureau study shows that the MTM provisions could affect the profitability of Indian Oil Corporation, BPCL, Bharti Airtel, Shree Renuka Sugars, JSW Steel, SAIL, Tata Motors, Ranbaxy Labs and MRPL in the third quarter as these companies had provided MTM losses during the quarter ended September.

The MTM losses on account of exchange rate fluctuations on commercial borrowings and interest on the unrealised portion of foreign currency convertible bonds are notional losses, which can be written back when the situation improves.

However, losses on account of exotic derivative products and hedging of export revenues against the fixed rupee-dollar rate are realised and, hence, cannot be written back.