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Rukmani Vishwanath

Mumbai , Nov. 12

REPEATED warnings from the Reserve Bank of India notwithstanding, corporates are still not hedging their foreign currency exposures, according to bankers.

While the RBI alerted corporates about the inherent risk of sitting on huge unhedged exposures in the mid-term review of the Monetary and Credit Policy 2003-04, bankers feel that corporates may take time to warm up to the suggestion in the wake of the strengthening rupee.

"Most corporates are still of the view that the rupee will appreciate in the medium term. The RBI has left it to the banks to ensure that they hedge their exposures. Large corporates have their own risk management capabilities and will act according to their own view," said Mr Shah Rukh Wadia, Head Treasury, Indus Ind Bank.

In the mid-term review, the apex bank laid emphasis on formulating a well laid-out policy to ensure hedging such loans. Most banks claim to already have put in place their own internal risk management policies based on which they have been extending foreign currency loans up until now. Bankers contend that while they insist that borrowers must hedge their foreign currency loans, some of their best clients do not see eye-to-eye with them on the issue.

The country's largest bank, State Bank of India, has an internal policy whereby it ensures that the corporate that is borrowing has a sound exchange risk management system in place. Sources close to the bank said SBI insists on knowing if the corporate has an exchange rate fluctuation reserve. If it does, and the corporate seems like a viable risk, only then does the bank not insist on hedging.

Bankers and analysts are of the view that only when there is a reversal in the upward trend of the rupee, will there be a mad rush to cover exposures. According to Mr U. Venkatraman, Head (Forex and Money Markets), IDBI Bank, "The actual cover will come only when there is a reversal in rupee appreciation and when depreciation starts. The US recovery has been forecast for the first quarter of 2004. Then the investment flows will start reverse to the US, the euro may fall and the dollar will start to gain against rupee."

"However, in the present time, India is the fastest growing economy in South-East Asia, after China. There are substantial dollar inflows despite a number of routes for inflows being plugged. FII investments in equity markets are increasing. In this scenario, it looks like the rupee is on an appreciation mode and it is unlikely that corporates will go for cover," he said.

Meanwhile, market watchers contend that a few public sector undertakings are beginning to hedge their external commercial borrowings, etc., where earlier they did not. One forex trader said, "Even if they start hedging the larger exposures, it is more than enough. PSUs have started in a small way, maybe the corporates will follow suit."

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