Hedging, cost cut: India Inc takes cover as rupee plunges against dollar

Firms securing forex, cross-currency cover

Hit hard by the rupee’s depreciation against the US dollar, Indian firms are adopting various measures, including securing forex and cross-currency covers and reducing input costs, to shield themselves from adverse impacts.

 

The rupee hit another closing low of 87.58 against the US dollar on Thursday amid weak domestic markets and importer demand for dollars. The Indian unit has lost 193 paise so far this year. Firms have slowed down foreign exchange borrowings to $125 million in January this year, a 79 per cent drop compared to January last year, when they raised $599 million. 

  “The widening current account deficit, falling exports, and rupee depreciation will negatively impact oil imports, leading to higher inflation and further weakening of the rupee,” said Prabal Banerjee, a financial advisor to top conglomerates.

  To navigate this crisis, Banerjee said, corporates were relying on natural hedges where available or opting for structured covers at lower costs.  “Some are securing cross-currency covers, using interest rate swaps to cut expenses, or employing principal-only swaps to mitigate risks, including booking forward dollar deliveries.”

  Chief executive officers (CEOs) of auto component firms, which import around $20.9 billion worth of materials annually, attribute the rupee’s decline to global market volatility. 

  “Trade tensions triggered by US tariff policies have dented risk appetite, strengthening the dollar as a safe haven. Despite global factors, India’s economy remains fundamentally robust,” said Udit Sheth, vice chairman of Setco Auto Systems. “We believe that once global volatility subsides, the rupee will rebound strongly,” he added.

  Saket Mehra, partner and auto & EV industry leader at Grant Thornton Bharat, highlighted the impact on India’s imports, which include electronics, semiconductors, battery components, and drivetrain parts, sourced mainly from Asia (66 per cent), Europe (26 per cent), and North America (8 per cent). “A weaker rupee increases input costs for manufacturers, especially in segments like electric vehicles and luxury cars that rely heavily on imports,” Mehra said.

  The pharmaceutical sector, which imports 65-70 per cent of its active pharmaceutical ingredients (APIs) and key drug-making inputs from China, is also adapting. These imports typically operate on 90-day contracts, with companies maintaining similar buffer stocks, meaning the currency impact is felt with a lag.

  Kushal Suri, director at Morepen Labs, noted that API prices have been rising since November last year with some like Montelukast (used in anti-allergic medicines), seeing sharp price hikes. “Overall, there has been a 3-4 per cent cost increase in the fourth quarter, largely due to dollar-rupee fluctuations,” he said. 

  India’s largest airline IndiGo said despite exceeding topline expectations, profitability took a hit due to rupee depreciation in the December quarter, said its Chief Financial Officer Gaurav Negi.

  The aviation industry’s foreign exchange risks primarily stem from lease liabilities and maintenance costs, which are largely denominated in US dollars.

  “The third quarter saw continued rupee weakness due to US economic strength, with the rupee depreciating 2 per cent by the quarter-end, resulting in mark-to-market forex losses of around Rs 1,400 crore,” Negi said.

  He explained that for every Rs 1 movement in the exchange rate, the company incurs a mark-to-market loss of Rs 790 crore on net forex liabilities. While these liabilities are long-term, accounting norms require their quarterly impact to be recorded. To mitigate volatility, IndiGo has been hedging foreign currency outflows, recording a Rs 59.1 crore gain from hedging contracts in the December quarter. “Going forward, we will enhance hedging and leverage natural hedges as we expand international capacity,” he added.

  An IndiGo spokesperson clarified that airfares are dynamically priced based on multiple factors beyond operational costs, including demand-supply dynamics, seasonal trends, competition, and price sensitivity.

  Fast-moving consumer goods firms, which rely on imported palm oil, are closely watching the situation. “We continue to see year-on-year inflation in crude palm oil and tea, while soda ash prices remain stable. While crude oil prices declined in Q3, the rupee depreciated by about 1 per cent. However, recent weeks have seen heightened volatility in crude palm oil, crude oil, and the rupee. We will continue to monitor price movements and take necessary actions,” said Rohit Jawa, CEO and managing director of HUL, during an analyst call post-December results.

  Officials of engineering and infrastructure major Larsen & Toubro (L&T) said they were benefiting from rupee depreciation. L&T CFO R Shankar Raman said as a net foreign currency recipient, the company gains from a weaker rupee. He assured that L&T’s foreign currency loans are well-hedged, insulating the company from forex volatility.

 

 

(Deepak Patel, Sohini Das, Ajinkya Kawale, Jaden Mathew Paul, Amritha Pillay & Dev Chatterjee)