The Hindu Business Line : Corporates rush to forward cover as rupee plunges

JOLTED by the sudden rupee depreciation corporates have begun rushing in to take forward cover on their hitherto unhedged exposures, especially external commercial borrowings.

Banking sources said, that the rush for forward cover by jittery corporates had wiped out the dollar discounts and pushed the dollar back into premium, as a result of the corporates surge to hedge. The hedging rush was sparked off by the sudden 4 per cent rupee depreciation in just one week. In addition some of the oil companies have also begun moving for hedging their exposures in view of firm oil prices and the sudden blips in the exchange rate.

So far corporates have raised close to $1 billion through external commercial borrowings. These borrowers had opted for ECBs in view of the prevailing low interest rates. Most of the ECBs were raised at rates of close to 2 per cent. However, barring the public sector and banking institutions most corporates left their exposures unhedged. This was despite cautions by the Reserve Bank of India last year itself against leaving foreign currency exposures unhedged.

The corporates who had left their exposures unhedged had done so in anticipation of an appreciation in the rupee against the dollar and had hoped to book profits in the process.

The banking sources said that forward premia for up to 12 months have now gone up to 0.2 per cent. Till last week, the dollar was at a discount of 0.30 per cent for 12 months. (The discount implied that forward rates are lower than the spot rates.) Most of the ECB borrowers have opted to hedge their exposure for their debt service obligations falling due. The sources said that exporters were cancelling their forward contracts to take advantage of the rupee's depreciation. Worst hit are borrowers who had raised ECB funds, when the exchange rate had fallen below Rs 44 to a dollar. PSUs and banks, which had raised short-term funds, were unlikely to be impacted. This was because most of them had already locked into favourable exchange rates for up to a year covering all their potential exposures.

The bankers said that key factors that have changed the outlook for the exchange rate was the possibility of a hike in dollar interest rates. In fact, traders said that this was one of the major factors that drove down the markets, in the country last week.

Among the large sellers last week were foreign institutional investors, who had taken the lead in selling their holdings in anticipation of the hike in dollar interest rates.

What has also triggered this speculation was the fact that most Asian central banks including the Reserve Bank of India were selling some of their dollar treasuries, in a bid to cut losses in the event of an interest rate hike by the Federal Reserve. The RBI had sold close to about $2.5 billion worth of US treasuries in February alone.

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