Despite the 11.2 per cent fall in the rupee’s value in 2022, a large section of exporters and importers are reluctant to fully hedge their foreign exchange exposure owing to higher costs involved in the process and are awaiting a definite direction in the movement of the currency.
While big corporates have robust risk management practices in place and the small and mid-sized players still have portions of their foreign exposure unhedged, a sizeable chunk of overseas loans are still unhedged, bankers said.
According to the June 2022 Financial Stability Report (FSR) of the Reserve Bank, of the outstanding external commercial borrowings (ECBs) of $ 180 billion, 44 per cent or $ 79 billion is unhedged. This included about $40 billion liabilities of public sector companies, mainly in the petroleum, railways and power sectors, which have assets with a natural hedge character. However, data on unhedged forex exposure of importers and exporters is not available but bankers said it may be manageable.
Hedging is a common financial practice used by exporters and importers to minimize the impact of unpredictable fluctuations in exchange rates. When the rupee falls, repayments become costlier in the absence of hedging. Hedging costs rise when the market faces high volatility. Forward contracts and currency derivatives are among the instruments used for hedging.
In the current year, the rupee has depreciated by around 11.28 per cent. Between September 1 and October 21, the currency has fallen by around 4 per cent, or Rs 3.4. It crossed the 83-mark for the first time on October 19. The Reserve Bank had recently asked banks to ascertain foreign currency exposure of entities annually. While exporters benefit from the rupee fall, importers take a hit if their exposure is uncovered.
Even banks are keeping a close watch on the unhedged portion of foreign currency exposures of corporates and nudging them to take action to reduce risks. “As a banker, when we lend in foreign currency, we generally insist on entities to hedge, so that the liability on currency risk is minimised,” said Suresh Khatanhar, Deputy Managing Director, IDBI Bank.
Bankers said the RBI guidelines state that lenders have to collect information from the customers who are having unhedged foreign currency exposure at the end of every quarter. If the unhedged exposure is more, it adds to the cost for banks and, so, they are keeping a track on unhedged foreign currency exposure, said a banker.
Some experts believe that since the contract duration of exporters and importers is not a long one, they don’t see one or two months of currency fluctuations as a challenge and can wait for some more time to get clarity on the currency’s movement before deciding on hedging. “Importers are waiting for a correction in the current level of the rupee to hedge their exposure,” a banker said.
Some exporters and importers see hedging as a strategy to speculate rather than from a risk management perspective, said a dealer from a forex advisory firm. By not hedging, they might be taking some risks that could go in their favour, he said.
Entities which do not hedge their foreign currency exposures can incur significant losses during the period of heightened volatility in foreign exchange rates, the RBI had said. These losses may reduce their capacity to service the loans taken from the banking system and increase their probability of default thereby affecting the health of the banking system.
Since the movement of currency is dependent on various global factors, it is imperative for exporters and importers to fully hedge their forex exposures, experts said.
According to Federation of Indian Export Organisations (FIEO) Director General and CEO Ajay Sahai, exporters are being encouraged to hedge certain portions of the value of their contracts at the time of finalizing the deal.
He, however, agrees that with constant depreciation in the rupee and the general indication pointing to a further depreciation, there may be a section of exporters who are not keeping foreign currency exposure hedged and, they may be playing with the exchange rate. But at the same time, there are more importers who are hedging their foreign currency exposures now.
“We always tell exporters that their profitability should come from their core business. Exchange benefits can just be an icing on the cake,” Sahai said.
