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Informist, Monday, Jun. 2, 2025

 

By Pratiksha

 

MUMBAI – If one had to summarise the management of the rupee's exchange rate under Reserve Bank of India Governor Sanjay Malhotra so far in one word, it would be "unpredictable". Since Malhotra joined in December, the rupee has witnessed highly volatile moves, not only cumulatively but on a day-to-day basis as well. The Indian currency's average daily range since the beginning of Malhotra's tenure on Dec. 11 has widened to 27 paise, against just 7 paise in the six months before he joined. In fact, volatility in the Indian unit picked up the very month Malhotra joined. In December, the rupee traded in a range of INR 1.24, as compared to just 44 paise in November.    

 

Market participants, initially taken aback by this exchange rate strategy, now seem to have decoded what the central bank is trying to do--encourage hedging activity among corporates.

 

"I don't think they (RBI) want anybody to be caught off guard by the sharp moves (in rupee), but they also don't want to protect a particular level," said a senior treasury official at a big state-owned bank. "So, by allowing the sharp moves, they are telling people to hedge themselves, which most have started doing now."

 

Forward contracts purchased by importers to hedge future foreign currency payments rose 41% on year in Jan-May, while hedging by exporters rose by just 1%, according to calculations based on data from Clearing Corp. of India. Forward contracts are the most commonly used derivative instruments for hedging. Hedging activity among importers and exporters likely gained momentum from December itself. Forward contracts purchased by importers to hedge future foreign currency payments rose 44% on month in December, while hedging by exporters rose by 19%, according to data from CCIL.

 

The exchange rate management strategy under Malhotra's predecessor Shaktikanta Das in the last two years of his tenure ensured that the Indian currency stayed rock steady come what may. The RBI's tight leash on the rupee under Das had turned both importers and exporters complacent about hedging their foreign exchange exposures. In July, Das had said in a television interview that the amount of unhedged foreign exchange exposures had risen in 2023. This, market participants said, is something the Malhotra-led RBI may be looking to undo through its high volatility exchange rate strategy.

 

"While volatility has been triggered by global events, it does appear that there has been a change in the approach to managing the rupee," Jamal Mecklai, chief executive officer at Mecklai Financial Services said. "Companies should at all times be focused on protecting their risk and should have a hedge programme that does not depend on a market view – recent movements (in rupee) make it clear that that would be a losing approach."

 

The central bank's efforts seem to have mostly borne fruit as looking at the volatility in the Indian unit, most importers and exporters have increased their hedging of foreign currency exposures, both for near- and long-term, market participants said.

"The rupee has been very volatile, so one has to be very active there. We are, of course, keeping the short tenure books hedged, hedging in long tenures has also slightly picked up," a treasury official at a large engineering company said. 

 

However, some companies are still staying on the sidelines and waiting for the volatility in the exchange rate to settle down before taking a concrete view. "Nobody wants to take a big risk right now. Feedback from exporters is buyers do not want to run the risk of tariff change and hence want to keep outstanding order positions at minimal levels," Anshul Chandak, head of treasury at RBL Bank said. "Everybody is just waiting for this whole risk event to get over. We have been advising importers to hedge just short-term exposures and asked them to not go very long."

 

Some market participants said that the central bank likely wants corporates to keep their foreign exchange exposures completely hedged due to the increasing and likely prolonged uncertainty globally.

 

US President Donald Trump's unpredictable tariff policies, coupled with geopolitical tensions between India and Pakistan have contributed to huge swings in the rupee. Case in point: After falling to a record low of 87.9500 a dollar on Feb. 10, the rupee rose past the 86.00 per dollar mark in just over five weeks, following which it rose past the 85.00 mark in just seven trading days. In May, the rupee traded in a wide band of 83.7525-86.1050 a dollar, most in a month since November 2022. 

 

Sameer Karyatt, executive director and head of trading at DBS Bank India, said that given the prevailing uncertainty, it remains challenging for risk managers to decide if the hedging decisions are based solely on market conditions. "The global uncertainty has impacted overall investment decision-making for business entities," he said. 

 

While market participants are still unsure if the RBI will continue to keep the exchange rate regime as flexible in the long-term as well, they are certain that the zero-tolerance-to-volatility regime is a thing of the past, and that they may have to find ways to deal with the new reality.  End

 

US$1 = INR 85.41

 

Edited by Vandana Hingorani

 

 

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