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Hedging gets tough on rupee volatility

Importers and exporters attempt to cushion fluctuations in rupee movements by getting into derivative contracts in receivables referred to as hedging.

, ET Bureau|
Updated: Jul 04, 2012, 09.06 AM IST
MUMBAI: When a private banker advised a jewellery importer to only partly hedge the US dollar payable in March, he did not realise that his client would end up losing money on that strategy.

The advice at that point was based on expectations that the worst for the rupee was over since the currency reversed the trend climbing 4.5% in the March quarter after collapsing 21% between August and December 2011.

But the reality turned out to be different with the currency falling 9.4% by June-end. It was not just the market movement was adverse, but the RBI's clampdown on the derivatives use also squeezed corporates. "Most of the importers were caught on the wrong foot in March,'' said Anil Bhansali, senior vice-president at Mecklai Financial, a firm that advises on corporate hedging. "They took buyers credit but did not hedge, expecting further recovery after February but the rupee tumbled from there."

Importers and exporters attempt to cushion fluctuations in currency movements by getting into derivative contracts in advance of their payments, or receivables, referred to as hedging.

However, most companies do not cover their full exposure but only partly, hoping for currency movements that could amplify their profits. While these kinds of bets help when the movement is unidirectional, it backfires when the movement defies past trends, which is what is happening in the rupee movement since August 2011. For companies, the restrictions that the RBI imposed in December also became a handicap since they could not quickly change trading positions based on market movements.

RBI measures to arrest rupee fall included taking off the flexibility to cancel or rebook the forward contracts, cutting of hedging based on past three-year average imports to 25%, from 75% which will be deliverable and reduced net overnight open positions. These measures salvaged the rupee in the March quarter, but proved to be a short-term relief, since the effect waned in a few months.

"The way rupee has depreciated in the last few months, it is severe,'' said Sandeep Singh, deputy MD, marketing, Toyota Kirloskar. "With depreciation of every one rupee post our hedges, we incur a loss of 9 crore."

While many companies including Tata Steel and Bharti Airtel have incurred losses in the last few quarters due to wild fluctuations in currency, companies could do well with covering at least half their exposure, though there's no total protection from the volatility.

"Very often they (importers) have been caught on the wrong foot in the recent past,'' says Parthasarthy Mukherjee, president, international business and treasury operations at Axis Bank. "We have strongly recommended corporates with no dollar receivables to cover a fair portion (at least half ) of their exposures though there is no one size fits all model here.''

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