Panicking over rupee movement, importers start hedging

Panicking over the rupee movement in the past month, importers have started hedging, slowly pushing up the rupee-dollar forward premium rates.

Forward premium is the extra amount of money over the spot exchange rate somebody has to pay to lock in a particular exchange rate at a future date.

The three-month forward premium has risen by about 20 basis points in a month as the rupee moved from the 63.80 to a dollar level to the 65.36 to a dollar level in the same period.

The preference of hedging instrument and tenure is also slowly changing, say currency dealers.

“Importers are coming back in the market and we saw a lot of hedging at around the 65 to a dollar level,” said Abhishek Goenka, head of currency consulting firm IFA Global.

According to Goenka, savvy importers were earlier using options, which have a lower cost than buying forwards. However, options have no protection if a currency depreciates beyond a point. The sudden rupee movement in the recent past has clearly spooked many to consider forwards.

When the rupee was ruling strong intermittent hedging used to happen in the one-month segment, now hedging regularly happens in the three-month segment, currency dealers say.

But there should be more discipline in hedging, says Samir Lodha, managing director of QuantArt Markets Solutions, a treasury consultancy firm.

“One good thing, though, is that both exporters and importers have taken hedging seriously. Earlier, it used to be one-sided mostly,” Lodha said.

Ananth Narayan G, a currency market expert, says hedging discipline eroded among importers in the recent past as the rupee remained strong, but they are now coming back.

“Since the beginning of this year, there has been a significant increase in unhedged foreign exchange exposures, witness the strong intervention by the Reserve Bank of India (RBI) buying dollars in the spot and forward markets,” Ananth Narayan said.

“In September, however, the RBI probably net sold dollars, perhaps to the tune of $5 billion, to meet hedging demand from importers and foreign portfolio investors,” he added.

The rise in hedging indicates pressure on the rupee, but the rupee may not depreciate very sharply, reveals a poll by Business Standard of 10 currency dealers and treasury heads.

But the rupee might reach the 66 to a dollar level by December, said those who were polled.

While the RBI has enough ammunition to protect against a rapid slide of the rupee, it remains to be seen if the central bank will act aggressively to protect the currency. Officially, the RBI’s stance has been it intervenes in the market to prevent volatility and not to protect a level.