Markets

Unhedged importers under stress as rupee loses against dollar

KOLKATA/MUMBAI: The rupees 2.5-per cent loss in April has pushed Indian importers to seek cover against their unhedged payables, but people tracking the foreign exchange market estimate that about 60-65 percent of offshore liabilities would still remain uncovered.

That should worry the regulators as unhedged foreign exchange fluctuation risks could create financial stress for importers and lead to systemic risks if the rupee loses further ground amid the widening current account deficit, rising global crude prices and hardening US bond yields.

"Importers normally prefer to hedge just about one-fourth of their offshore exposures,” said Anindya Banerjee, currency analyst at Kotak Securities. “Given the rupees sudden weakness, we could sense some panic among importers, who are now rushing to cover short-term liabilities. The overall unhedged exposure may have come down by just about 10%."

Official data on the size of unhedged position are unavailable, although a foreign bank estimated it around $60-65 billion in March. Indias monthly import bill comes to about $40 billion.

The rush to pay forward premium now is putting additional pressure on the rupee, dealers said. While importers have shown some urgency in covering their risks last week, experts said they are mostly covering short-term positions.

The premium for buying forwards contract, a mechanism that allows buyers to fix future exchange rate at a current rate, has risen to 83.50-85.50 paise from 82.50-84.50 paise for six-month maturities.

“Importers are mostly unhedged,” said KN Dey, founder, United Financial Consultant, a forex advisory firm. “The rupees steadiness in the past one year has made them complacent to keep exposure open. Importers have woken up now as they have started covering one or two months offshore liabilities.”

Currency hedging is a way to protect against exchange rate volatility and minimise losses on adverse movement. The Reserve Bank of India (RBI) made hedging mandatory for companies raising money through the external commercial borrowings (ECB) route in 2016 but its not a must for either importers or exporters.

The benchmark US 10-year Treasury yield has crossed 3%, a four-year high, on concerns over the growing supply of government debt and inflationary pressures from rising oil prices. Analysts, therefore, expect the rupee to be under pressure in the next few quarters. CARE Ratings expects the rupee to remain in a volatile range of 66.5-67.5 in May, while some analysts have said the rupee could touch 68 to a dollar by December.

A weaker rupee pushes up the domestic cost of fuel products, creating inflationary pressures and a pricing scenario that demands a tightening in monetary policy. Deutsche Bank expects the central bank to raise the repo rate by 25 basis points in June to 6.25%.

Kotak Institutional Equities projected the current account deficit at 2.4% of GDP, higher than in 2013-14, taking crude prices at $65 a barrel on an average.

The local currency lost more than 2.5% in April amid foreign fund outflows. The rupee sell-off accelerated last week on the back of stronger oil prices and foreign investors reducing their rupee-denominated exposures, Morgan Stanley said in a note.

“Increasing twin deficits require either a weaker currency or higher yields to compensate investors for the risk. The higher yield scenario plays out when growth is robust enough to handle higher rates. Fiscal support, positive corporate earnings and 2Q data momentum looking strong against this backdrop should provide support to both risk and (the) dollar,” the note said.

Importers cash flows are also hit in the absence of buyers credit after the Reserve Bank of India banned bank guarantee instruments, such as Letters of Undertaking, which were used by importers to pay off their overseas clients. In the absence of such facilities, importers are buying dollars from the spot market directly to meet their overseas liabilities.

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