RBI asks banks, firms to hone risk mgmt

FIRST QUARTER REVIEW OF ANNUAL MONETARY POLICY 2007-08

The Reserve Bank of India (RBI) has urged banks, financial institutions and corporates to gear up their risk mitigation strategies to deal with higher economic volatilities.

The banking regulator has yet again warned corporates, in particular exporters, to hedge their currency exposure and banks to monitor risk arising on account of interest rate movements. RBI Governor Y V Reddy said, "Stress testing is advised to corporates and large financial institutions.''

Considering the global movements, the RBI in its policy statement has asked corporates and banks to monitor various types of exposures, including economic exposure, and to ensure hedging of currency and interest rate risks to balance sheets that might impact the quality of assets.

"Indian corporates are going global. They are looking at assets globally, which exposes them to various risks, including transaction, translation and currency risks. Hence they have to take prudent steps to manage their balance sheet,'' said Sucheta Mehta, senior economist, Standard Chartered Bank.

Small exporters have been the worst hit by the rupee appreciation.

The rupee has gained over around 8 per cent in the last three months and 11.6 per cent in the last one year. Unlike large exporters, they have no financial reserves to fall back on.

As they use locally produced raw material, they do not benefit from imports becoming cheaper with the rise in the rupee. As a result, these exporters have been left with no option but to raise their prices. This has had an impact on their operations.

HSBC economist Robert Prior-Wandesforde said, "Our currency team expects the rupee to rise to 39 against the dollar by end-2007 and 38.5 by mid-2008.'' The rising rupee could hit the corporate world, in particular exporters and information technology companies that have not hedged their currency positions.

"The corporates and exporters that we have exposure to are seen taking active steps to manage the currency risk. Considering the view on the rupee, corporates have become cautious to exchange rate risk. The RBI is just trying to sensitise the industry to potential risks,'' said Vishakha Mulye, chief financial officer, ICICI Bank and Group.