Opportunity for India Inc to take forward cover widens as rupee strengthens

Many mid-sized firms don't take proper forward cover, exposing themselves to risk; others are going for it as they feel the rupee will weaken again and hit 80 to the dollar

Chief financial officers (CFOs) of top Indian companies are back in the war room as a stronger rupee versus the dollar is giving them an opportunity to protect their unhedged foreign exchange exposure.

Despite a volatile currency, a large number of Indian firms -- especially mid-level -- do not take proper forward cover, thus exposing them to financial problems in case the rupee weakens against other currencies.

“Companies would do well to take this opportunity of low cost cover and protect themselves as much as they can while the strong rupee exists,” said Prabal Banerjee, former finance director, Bajaj Group. The party won’t last long, he warned.

The CFO of a large infrastructure firm said with the rupee strengthening the company was taking forward cover because it expected the rupee to weaken in the months to come.

“The strong rupee is a temporary phenomenon and we expect the rupee to touch 80 to the dollar in a few months. We are, therefore, taking forward cover,” he said.

Currency consultants are pushing their importer clients for hedging. The target in the past few days has been to hedge for the near term, but some are doing so for the medium term also. Sensing the hedging demand, the USD-INR premium has started inching up.

“Global equity is down for a third day in a row and the market is becoming nervous about US inflation. There is a possibility of a taper tantrum. The rupee at 75 is much more likely than 72.5 at this stage. Hence we are asking importers to hedge heavily and exporters to fast utilise the hedges,” said Samir Lodha, managing director and chief executive officer of QuantArt Market, a treasury consultant firm.

The rupee has shown resilience against the dollar vis-a-vis its peers in the region. The country ran a current account surplus of $27 billion till February this year. In FY21 till February, India’s net foreign direct investment (FDI) inflow was $41 billion, and foreign portfolio investment (FPI) $36 billion. Despite $104 billion of durable foreign currency inflows, the dollar weakened by just 2 per cent against the rupee in nominal terms, from 75.30 in March 2020 to 73.90 in February 2021. This is even when the global dollar index, which measures the greenback’s strength against other major currencies, dropped by 8.2 per cent from 99 to 90.9.

Therefore, the rupee has the scope to depreciate, especially as there is a huge carry trade in the offshore market.

“With significant open positions in the USD-INR carry trade, a vibrant non-deliverable forward market with big players and a high forward premium ... if due to any event, the positions are unwound, it can put significant depreciating pressure on the rupee, thus impacting inflation adversely,” wrote Soumya Kanti Ghosh, chief economic advisor to the SBI group, in a report.

Importers don’t want to get caught even as some of this is getting materialised now.

“Importers are rushing to cover their positions for the next two months,” said Abhishek Goenka, managing director of IFA Global.

“The Cairn issue is back (leading to some volatility in the markets). Premiums are turning elevated and the Reserve Bank of India is active in the forwards markets through sell-buy swaps to cool the rates. The rupee would be ideally back to 74.50 a dollar level in the near term,” said Goenka.

The rupee was trading at 73.44 on Wednesday, down from its previous close of 73.34, indicating a depreciating bias.

“Public sector banks could likely be absorbing inflows, i.e. buying spot and pushing the purchases forward. The one-year forward yield has risen to 5.30 per cent, approaching within striking distance of recent highs of around 5.40 per cent,” said Goenka.

The rise in forwards could indicate higher hedging.