The Hindu Business Line : Exporters cancelling, rebooking forward hedges

Tightening liquidity
Deferral of receipts has worsened the shortage of spot dollars in the market.
No significant non-debt capital inflows, particularly from FIIs.
Refinery payment obligations have escalated with global oil prices soaring.

C. Shivkumar
Swetha Kannan

Bangalore, March 12 Exporters have begun cancelling and rebooking their forward hedges in line with the dollar’s northward movement against the rupee.

Bankers said the cancellations started after the rupee-dollar exchange rate breached the Rs 40.25-mark.

Among those to resort to this strategy include commodity, garment, diamond and software exporters. Exporters had initially taken cover, when the rupee breached Rs 40, anticipating a reversal. However, bankers said that since the reversal had not happened and the dollar moving further northward, close to Rs 40.60, exporters had chosen to cancel and rebook their forward contracts. Bankers said that many of the exporters resorted to the step to maximise their earnings.

Deferral of receipts

However, the deferral of receipts in turn had worsened the shortage of spot/ cash dollars in the market, tightening liquidity. The tight liquidity was evident from the support to the repurchase window at Tuesday’s liquidity adjustment facility auction. At the LAF auction, 23 participants mostly banks accessed the repo window for Rs 34,805 crore.

What also made the situation worse, was the absence of any significant non-debt capital inflows, particularly from foreign institutional investors. FII inflows since the beginning of this month were a negative $207 million, according to data from the Securities Exchange Board of India.

unwinding positions

Moreover, many of the foreign private equity investors have also begun unwinding their investments. Private equity investors during the last few months have faced liquidity problems abroad, since most of them were in the leveraged buyout business in the country (Leveraged buyout implied using borrowed funds to fund equity buyouts). Consequently, some were pulling out for funding their domestic liabilities.

Besides, the markets were also overwhelmed with dollar demand from oil refineries for meeting their payment obligations. Refinery payment obligations have escalated with the global oil prices close to a record $108 a barrel or about $790 a tonne.

Forwards cheaper

With the exporters deferring their receivables, the dollar has gone into a discount for up to six months. The discount implied that forward dollars were cheaper than spot. Six months was at a discount of 0.17 per cent. Bankers said that this is largely because exporters were attempting to lock into the current exchange for longer period, anticipating a reversal.

Export house Gokaldas Images’ Chairman, Mr Jagadish Hinduja, said, “I see the rupee strengthening. Therefore, we will continue to hedge.”

But the discounts were also largely due to the absence of forward covers from importers. Importers and corporates with the external liabilities have mostly preferred to leave some of their positions open expecting a correction in the coming weeks.

Importer forward demand would have somewhat corrected the anomalous situation, bankers said. Bankers said the anomaly was on account of the fact that the interest rate differential currently favoured a premium for the dollar. The Fed funds rates in the US are currently 3 per cent and the overnight Reverse Repurchase rate from the RBI window is currently 6 per cent. As a result, importers expect large arbitrage inflows towards the beginning of the next financial year.

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