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Informist, Thursday, Jan. 9, 2025

 

By Pratiksha and Sourabh Kumar

 

NEW DELHI – Indian corporates have actively started hedging their foreign exchange exposures, in light of the recent sharp fall in the Indian currency against the dollar, market participants said. 

 

Indian importers and exporters had left a huge portion of their foreign currency exposures unhedged since late 2023, primarily due to historically low volatility in the rupee on the back of the Reserve Bank of India's extremely tight grip. However, ever since the RBI has loosened its hold on the currency, causing an over 2?preciation in the rupee in the last two months, they have been shaken off their complacency, according to market participants.

 

"Importers are now waking up. Exporters' interest may have gone down a bit, and they are only selling (dollars) at some levels, but importers are worried as of now. They are looking to hedge and willing to pay premiums. If the market is going only one way, everybody wants to hedge and that is one reason why you are seeing the premiums going up," said Sajal Gupta, executive director and head of forex and commodities at Nuvama institutional Equities.

 

The Indian unit has been hitting successive record lows in recent times, hitting a lifetime low of 85.9325 a dollar on Thursday, as the dollar has gathered steam ahead of US President-elect Donald Trump taking office on Jan. 20. The RBI, which earlier prevented even moderate fluctuations in the exchange rate, seems to have developed tolerance for depreciation in the local unit amid depleting foreign exchange reserves and record overvaluation in the currency against its peers.  

 

Market players said most corporates have been buying dollars for one- to three-month forward delivery, while some have also been buying forward dollars in the longer tenures. The premium on the one-month exact-period dollar/rupee forward contract has jumped a whopping 200 basis points from November, while the premium on the one-year forward contract has surged almost 44 bps over the same duration. Forward contracts are the most commonly used derivative instruments for foreign exchange hedging.

 

"The hedging has definitely increased. While we were already hedging in shorter tenures, we have now started booking forwards in longer tenures," a foreign exchange trader at a large state-owned oil marketing company said. "While we thought the rupee would fall, nobody expected it to fall so much in 20-25 days in December. That is now driving people to hedge."

 

Notably, forward premiums have risen despite a sharp jump in US Treasury yields, partly due to the pickup in the hedging activity by corporates. The benchmark 10-year US Treasury note has risen almost 40 bps from November on expectations of a shallow rate cut cycle by the US Federal Reserve in 2025. Premiums on a forward currency pair are reflective of the interest rate differential between the two countries.

 

"Logically, the premiums should have come down because US yields are rising, but primarily due to importers' demand, premiums as of now are going up. There is a slight impatience or some anxiety in the market," Gupta said. The one-year forward premium rose to 2.75%, on an annualised basis, on Thursday, the highest since Oct. 13, 2022.

 

Going ahead, currency traders expect hedging activity among importers to only increase as future events paint a bleak picture for the Indian currency. "All the importing corporates are back to hedging now. We are trying to keep a cover of at least 6 months," said a currency trader at a big information technology company. "Once there is more clarity on the new governor's strategy, people will decide on their future course of hedging. We are also waiting to see if Trump executes everything he promised. There is uncertainty there too."

 

The potential strengthening of the US dollar and weakening of the Chinese yuan after Donald Trump takes over as president this month pose a significant risk to the Indian currency, according to dealers. Moreover, the sharp fall in the rupee after Sanjay Malhotra took over as RBI governor on Dec. 11 has fuelled speculation about a shift in the apex bank's intervention strategy.

 

While importers are quickly moving towards hedging their exposures, most exporters are keeping on the sidelines as the rupee is seen moving in only one direction – downward.  End

 

US$1 = INR 85.85

 

Edited by Tanima Banerjee

 

 

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