The Hindu Business Line : Start hedging liabilities, bankers tell importers, cos

Bangalore, Nov. 21 Bankers are quietly beginning to advise importers and corporates with foreign currency debts to starting hedging their liabilities.

Banking sources said they said that with high oil prices of $94 a barrel, the rupee was due for some correction. In fact, oil companies have begun drawing on their credit lines for meeting their import payment liabilities. Public sector refiners access their foreign currency requirements only from the spot markets. This has pushed down the rupee to 39.39 from the high of 39.27 on November 11.

The Vijaya Bank’s Treasury head, Mr Manjayya Shetty, said: “While it is left to the individual customers’ discretion to hedge, we believe there is a short term correction in the offing, with the refinery demand.”

During the last few months, most corporates and importers had left their positions open in the view of inward capital inflows. The rupee had appreciated close to 10 per cent against the dollar since the beginning of this fiscal.

But bankers said that with the new guidelines of the Securities and Exchange Board of India on Participatory Notes in place, foreign institutional investors had begun unwinding their investments. Global hedge funds have used the P-Note route to circumvent registration costs in the country. Moreover with the US Federal Reserve expected to cut rates by another 25 basis points, investors were moving back to US Treasuries for booking profits.

Capital flows

Says HDFC Bank’s Chief Economist, Dr Abheek Barua, “Capital flows have not been very significant after the P-Note curbs. No big ticket FDI or other large foreign investments so far.”

Besides, bankers said fresh external commercial borrowings (ECB) had decelerated considerably after the RBI imposed end use norms in August this year. The curbs were imposed after corporates took advantage of low dollar interest rates and the appreciation of the rupee.

The restrictions were intended to contain the money supply growth and the consequent inflationary impact.

The RBI’s target for money supply growth is between 15-17 per cent, though nominal growth has remained upwards of 20 per cent.

The ECB/capital flow slowdown was also on account of the dollar liquidity crisis after the sub-prime/CDO (collateralised debt obligation) meltdown.

Liquidity tightening

The resultant liquidity tightening has increased the spreads for ECB borrowers. Spreads are now upwards of 150 basis points over the London Interbank Offered Rates for highly rated domestic corporates, removing the interest arbitrage option. In April this year, these corporates were in a position to raise foreign funds at spreads close or below 100 basis points.

The capital flow slowdown has taken the load of the RBI’s interventions. In fact, interventions have considerably moderated. At the Liquidity Adjustment Facility auctions, the recourse was to the repurchase window, unlike in the past when it was the reverse repurchase.

The repurchase window is the RBI’s liquidity support mechanism for banks through purchase of securities. At Tuesday’s LAF auction, there were 35 bidders (banks and primary dealers) for borrowing Rs 32,735 crore from the repo window.

But the capital flow slowdown could also mean that the RBI’s money growth target was likely to materialise. Dr Barua said, “Money supply growth is likely to be around 18 per cent.”

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