The Hindu Business Line : Re appreciation and business decision-making

Chennai, Sept. 25 The rupee tale has two sides – the visible one that shows as the ascent of the rupee on the dollar chart; and the not so visible, the changes that the currency movements have been causing to decision-making in companies. Business Line sought to get a feel of the rupee view from the finance chief’s desk…

“Let’s cut to the chase. There has been a major functional correction over the last nine months resulting in a significant appreciation in the Indian rupee,” begins Mr Balraj S. Hora, Asia Pacific Finance Director of Hewitt Associates, a global player in human resources (HR) consulting, multi process HR outsourcing and benefits administration.

“Analysts expect that Asian currencies will continue to rise moderately through 2008 except the Chinese yuan, which will perhaps go up by another 5 per cent,” he adds, sharing his personal views on the issue, over the email. “Inflation seems to have peaked. Money will keep moving around the world whenever (e.g. Fed cut) and wherever it makes economic sense to do so.”

Excerpts from a brief interview.

What then would be your strategy on business transactions that are categorised as foreign operations?

From an accounting perspective, local and international standards lay down the pronouncements for translation and transaction differences. From a standpoint of foreign currency exposure, it is relevant to refer to both these areas of foreign operations though I would like to just dwell on the sentiment on the street today on hedging, which is primarily transaction oriented.

Isn’t hedging the natural response to handle currency risk?

May be. But as political and economic cause-effect have a seamless interconnect across the world it is integral to have a long term view of your business operations and stakeholder interests before you take the simple step of picking up your phone and calling your banker to execute a hedge transaction. Knee jerk reactions could be suicidal.

The alternative?

Multinational corporations may be well advised to take a central corporate view as there could be natural hedges available in a multi-country, multi-currency operating environment. A diligent assessment of specific vs collateral factors that have a bearing on the rupee need to be considered. Many observers feel that the recent strengthening of the rupee is more to do with an external action of a Fed rate cut than a sudden intrinsic situation which is rupee specific.

What can be the right hedging strategy?

Any hedging strategy has an inherent risk appetite factor that an organisation can accommodate, and which is typically formulated by the board of directors. Hedging a part of the transaction and fixing stop loss benchmarks is a considered approach that may leave room open for an upside while ensuring that you don’t get beaten up on the downside.

So hedge if you must – but the decision needs to be sponsored by a business decision and not a financial decision. Be aware how different translation and transaction differences affect your business and finally do remember –fools rush in where angels don’t re-enlist.

Wouldn’t a price revision offer an antidote in the current situation?

A price increase to cover a potential appreciation of your currency may be counter-productive.

Which leaves us only with the costs to be worked on?

Yes. So, how about getting smarter on operations like compressed workweeks to generate opportunity savings? A strong rupee is also a wake up call for all those businesses that may be operating with high infrastructure and wage costs. Are they really in business?

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