Foreign Currency Derivatives Market Bullish

While the rupee derivatives market has been struggling to take off since the Reserve Bank of India announced guidelines last year, the foreign currency derivatives market has seen strong growth, say a cross section of bankers.

Driving this growth have been a combination of external conditions and a greater awareness of the various hedging instruments available in the market.

However, no firm figures are available about the volume of foreign currency derivatives transactions as there is no central clearing house.

But bankers said volumes have multiplied as corporates have rushed to buy derivatives cover for their foreign currency exposures in light of the global volatility in currencies and an uncertain future of interest rates.

 

"Almost every company which has any sizeable foreign currency borrowing has sought to hedge itself against adverse interest rate movements," Anindya Dutta, vice-president of forex and interest rate derivatives at Credit Lyonnais said.

"This is definitely a trend which is happening. It is due to interest rate movements as well as a greater awareness on the part of corporates and banks as to the range of products available to hedge interest liabilities," Amit Gupta, head of treasury corporate sales at HSBC said.

However Arvind Sethi, managing director, global capital markets at Bank of America said there have been no significant increase in interest on the part of corporates looking to hedge their foreign currency liabilities. "I don't see a big trend one way or the other. There are some people looking to take advantage of lower rupee rates but there are not that many projects and companies are a little averse to dollar exposures right now."

The Federal Reserve's series of rate hikes, the last on March 21, has forced US dollar Libor rates to increase sharply. For instance, six-month Libor has increased by almost two percentage points from a level of 4.96 per cent in January 1999 to current levels of 6.88 per cent.

Since foreign currency borrowings of most Indian companies is denominated in US dollars at floating rates, this has led to a sharp increase in interest costs to them. At the same time, Indian interest rates have declined. This has raised the opportunity cost of borrowing in US dollars.

Corporates are buying interest rate swaps wherein they pay a fixed rate in return for the counter party paying the floating rate, bankers said.

Corporates are also trying to take advantage of the weakness of the Euro and other currencies vis--vis the dollar by buying currency swaps with banks. The bank pays the corporate a principal amount and interest denominated in dollars while the corporate pays the bank in Euros at a fixed rate.