As the rupee continues to slide against the dollar, worried Indian companies are rushing for higher forward cover, which is raising their costs and eating into profit margins. "As the rupee falls further, it's time for Indian companies to move away from pegging their exports and imports to the dollar and look at other global currencies," said the head of international finance of a large company, on condition of anonymity.
The sudden fall in the rupee has caught small Indian companies by surprise, as many have not hedged their exposure. Since May 1, the rupee has fallen 3.31 per cent, due to the increasing strength of the dollar against all currencies, as well as the country's high current account deficit. Bankers say big companies hedge about 50 per cent of their exposure. So, their profits wouldn't take a big hit, though much depends on how much further the rupee depreciates.
Abhishek Goenka, co-founder of India Forex Advisors, says, "Often, we have noticed small importers do not hedge their dollar exposure…their bottomline will definitely take a hit with a fall in the rupee."
As of now, companies are in a wait-and-watch mode, as the rupee has already depreciated significantly and hedging costs stand at six to seven per cent of their exposure. However, if the rupee depreciates further through the next few weeks, as is widely expected, more importers are expected to cover their dollar exposures. Indian oil and power companies are the biggest importers in the country.
"Some importers will certainly feel a lot of pinch. But we are more or less market-neutral and most of our forex exposure is almost always fully hedged. As a group, we take a conservative stance on foreign currency," said Akhil Jindal, chief financial officer of Welspun Group.
Meanwhile, exporters are rejoicing, as a falling rupee is adding to their profits. L Krishna Babu, chief financial officer of pharmaceuticals exporter Divis Laboratories, said, "All our positions are open and we have no hedges. We have consciously chosen not to hedge our positions because we feel the rupee could remain under pressure."
Through the next few months, exporters are likely to adopt a wait-and-watch stance before taking hedges, as a falling rupee would increase their profits.
The likely paucity in foreign currency is a factor Indian companies have to increasingly worry about through the next few weeks.
With the US likely to reduce its monetary easing, liquidity inflows in foreign exchange are likely to see a decline; banks are likely to ask for additional hedging from companies that avail of dollar loans. Traditionally, companies with high ratings don't face hurdles in raising dollar loans. However, those with low ratings could find it difficult.
Bankers said companies that have raised foreign loans or bonds could face the tailwinds of a falling rupee. Says Goenka: "There could be a slack in dollar inflows due to a reduction of quantitative easing and companies might find it a little difficult to raise dollars." Banks are likely to ask for further hedges against external commercial borrowings, which is likely to increase costs for these companies.
For companies with foreign currency convertible bond exposure, a falling rupee and the falling stock market come as a double whammy, as redemption could mean higher costs.
