The Hindu Business Line : Rupee rally sees more unhedged exposures

IMPORTERS, exporters and corporates are betting that the rupee rally would continue at least in the short to medium term, and consequently, most of them are avoiding taking a hedge on their foreign currency exposures.

In fact, many feel that their stance over the past year, of not hedging based on a view of the rupee appreciating, has been vindicated.

The domestic currency, which has been rising steadily against the dollar, staged a sudden sharp appreciation over the greenback in the past fortnight. The rupee began this week by rising 40 paise against the dollar in a single day on Monday to close at 44.06/07.

Observing the recent trend in the domestic currency, the entire market seems to have formed a view that the rupee is only going to strengthen over the next few months.

Bankers admit that most of them are not even persuading their clients to hedge their foreign currency risks at this point. "How can we tell them to go in for a hedge when the rupee is appreciating like this? In those cases where they have a natural hedge, it is find; otherwise we don't insist," said a top official with a public sector bank.

Most bankers admit that they haven't seen customers going in for hedging in the past 8-12 months.

According to banking circles, the total amount of un-hedged foreign currency exposures in the market may have risen to anywhere between $15 and $20 billion. Last year, the figure was pegged at $8 billion, but since then the demand for foreign currency loans has skyrocketed.

In the mid-term review of the Monetary and Credit Policy 2003-04, the Reserve Bank of India had cautioned corporates about the inherent risk of sitting on huge un-hedged exposures.

The apex bank had emphasised that banks must formulate a well laid-out policy to ensure that their customers hedge such loans.

While most banks 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 admit that they have stopped insisting on a hedge.

"We cannot legally enforce any kind of hedging for our customers. Even the RBI can only advise corporates and can't regulate them. Most corporates have very active treasuries and recruited dealers from the banking sector. These people know that at this point it is better to keep un-hedged positions," said a banker.

However, some analysts advise caution. "The rupee has moved too far, too fast. There will be a correction and which is why it is advisable to go in for a hedge now," said one.

According to a senior banker with a leading private sector bank, the ideal thing to do is to increase the hedge when the currency moves in your favour.