The Hindu Business Line : Appreciating rupee: `Exporters better advised to book a forward cover'

Chennai May 5 The rupee has been witnessing significant appreciation against the US dollar. How should the corporates react to the accentuated currency movements?

"Importers are better advised to wait for any hedging strategy since they may actually end up getting a better exchange rate in the spot market with an appreciating rupee," says Mr Ravi Trivedy, Executive Director, Business Advisory, KPMG Advisory Services.

His counsel to exporters is to book a forward cover and benefit from exchange rate and interest rate differentials between the rupee and the US dollar.

Speaking to Business Line on currency movements that have been causing concern to companies, Mr Trivedy is of the view that the rupee appreciation is not just due to improvements in the Indian economy. "Increasing FDI inflows and rising exports, coupled with a weaker US economy are the key factors for the rapid increase in the rupee's value," he says.

The relative weakness of the dollar has elicited mixed reactions from Indian companies, depending on their status as importers versus exporters, comments Mr Trivedy.

"Importantly, the reactions are not the standard `good for importers-bad for exporters' type but linked to the hedging risks on long-term contracts."

Excerpts from a brief interview:

On the impact of rupee appreciation on importers and what they should do.

Large importers should ideally be pleased with a lower import bill for raw materials or plant equipment.

However, since most of these importers have long-term contracts, they would have taken some hedging cover.

When the relative value of the US dollar depreciates then the importers who have hedged themselves against adverse FX (forex or foreign exchange) movement (i.e. depreciating rupee versus the dollar) stand to lose out.

In the recent past, with the strengthening of the rupee importers who had anticipated a year-on-year depreciation of the Indian rupee, have stood to lose as the premium that these importers pay to buy the insurance to cover the risk is more expensive compared to the actual depreciation of the Indian currency.

In short, those importers who have only hedged partially their dollar-denominated foreign currency liabilities, or who have preferred to take a view on `not hedging' their exposure, have benefited.

On the suggested course of action for exporters.

In case of exporters who have their receivables denominated in foreign currency, in the recent past, there has been a case for them to actually book a forward contract as they would probably end up gaining a little bit considering that the combined cost of the `receiving' of the forward premium plus the extent of appreciation of the Indian rupee offsets any losses attributed to not taking a forward cover.

In short, it makes economic sense to book a forward cover, and lock-in a better exchange rate in the US dollar/rupee terms.

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