The Fcnr Route For Working Capital

The initial fears on international funds basically come from

the rapid devaluation the rupee has had in the past except for

probably the last two years. The rupee has recently held steady because of inflows on account of equity investments and the lower demand from imports. Viewed with the fact that the US dollar has internationally strengthened against all major currencies, especially the DM and the Japanese yen, it can be interpreted that the rupee has in fact appreciated. But then can this trend be expected to continue? Already unhedged exporters having exposures in the DM and yen must be repenting their urge to export and working overtime to find means to cover their costs and even exporters with US dollar

 

exposures must be finding it difficult to meet inflationary pressures. Both the Finance and the Commerce ministries are probably aware about this and are encouraging imports by lowering tariffs and

simplifying exim policies. It can therefore safely be assumed that the rupee should depreciate, albeit in a more stable manner, if exports have to get the boost and the reserves to comprise of the more stable export proceeds and FDI investments rather than equity inflows which in all aspects are hot money.

The second fear is the prospect of losing a fortune through rapid currency movements internationally and through derivatives - i.e. financial instruments such as swaps, futures and options. Domestic instances of Japanese LCV collaborators and international instances like Procter & Gamble's derivatives loss of over US$ 100M and the Orange Country disaster of 1994 and the more recent losses of Sumitomo, Daiwa and Barrings raise nervous questions about overseas funds and derivatives and the necessity to use them.

It should be remembered that international funds are a lot cheaper and provide on opportunity to the management to integrate their companies and become competitive in global markets. It is too good an opportunity to let go and along with the risks, it provides to the user options to hedge against the same.

Unlike financial organisations which make their living in the

financial markets and will therefore always be at some risk, manufacturing companies should best treat their currency exposures as cost centres and book profits only on exceptional circumstances and under professional advise. The best adviser is obviously the dealer of your bank or the lending financial institution and the larger and more active the bank the better advise and opportunities would one get.

In case of substantial exposures it would also make sense to take the services of professionals who monitor client exposures and make suggestions on it regularly.

An internal control procedure with risk management systems should be in place at every corporate which should be reviewed by an independent Board and the senior management should be confident that what the organisation is doing is hedging and not speculation.

(The author is director (finance), India Meters Ltd. The views

expressed here are his own.)