Indian firms ramp up long-term FX hedges on rupee swings, cheaper costs

A rise in the Indian rupee's volatility, coupled with a decline in the cost of protecting against currency weakness has prompted firms to increase longer-tenor hedges to shield their balance sheets.

The Reserve Bank of India's (RBI) apparent tolerance for bigger currency swings and uncertainty brought on by US trade polices have led companies to hedge more, bankers said.

Corporate purchases of forward dollars for a tenor of more than a year jumped over two-fold in the November-January period compared to the prior three months, per data from clearing house CCIL. The increase was of a similar magnitude on a year-on-year basis.

An FX salesperson at a Mumbai-based private sector bank said that the number of enquires for hedging longer-tenor dollar liabilities had more than doubled, with most clients securing exposures of up to two years.

The rise in hedging longer-tenor exposures follows a pickup in shorter duration hedges.

"We have started to see the trend in companies looking to hedge their longer-tenor euro and GBP (British pound) liabilities as well," the salesperson said, declining to be identified since he is not authorized to speak to the media.

The rupee depreciated to 88 from 84 against the US dollar in just four months, a significant departure from the narrow trading range that companies were accustomed to.

The dollar-rupee pair's one-month realized volatility is at its highest in two years and is nearly at par with the offshore Chinese yuan.

The realised volatility reflects the extent to how things have changed.

Companies with dollar receivables have accelerated their hedging activity too, albeit at a more measured pace. Forward dollar sales for tenors exceeding one year rose 25 per cent from November to January from the prior three-month period.

For exporters, the "motivation" is to lock in the higher rate (on dollar/rupee) while for companies that have longer-term dollar liabilities, it is about "risk management" and "adjusting to the new reality" on the rupee, an FX salesperson at a different bank said.

RBI's FX SWAPS AND HEDGING COSTS

The RBI recently conducted dollar-rupee buy/sell FX swaps to bolster rupee liquidity in the banking system. After the $10 billion three-year swap last week, the central bank announced another similar swap on Wednesday.

These measures have reduced the cost of hedging long-term liabilities, making future dollar purchases more affordable for companies.

The three-year hedging cost dropped by 25 basis points following the RBI's swap on Wednesday.

"Clients who had postponed their hedging activities owing to the higher cost, are now coming back with enquiries," said Akshay Kumar, head of global markets at BNP Paribas India.

The bank has seen a pickup in hedging demand both from clients with unhedged exposures and those looking to raise fresh dollar liabilities, he said.