The Hindu Business Line : Exporters resume taking forward cover

Bangalore, Feb. 13 With the rupee sliding against the US dollar, domestic exporters have begun hedging their forward receivables. They think this might be a good opportunity to protect themselves should the direction of the rupee shift once again and begin appreciating.

Spot rupee is currently quoted at Rs 39.76 against the dollar, down from the February 1 level of Rs 39.36. Bankers said that those taking forward cover included diamond, commodity and some software exporters.Bankers said exporters are beginning to take cover on their advice.

With exporters beginning to hedge their receivables, forward premia crashed last week-end. Forward premia for the dollar moved into a discount for up to three months. Last week-end, forward dollars, between one month and three months, were actually cheaper than spot.

The discount was 2.43 per cent to spot for one month and 1.01 per cent for three months. The Vijaya Bank’s General Manager (Treasury), Mr K. Shantarama Kamat, said: “There was also some shortage of spot dollars.”

This resulted in some banks selling forward dollar and purchasing spot, contributing to the shift to a discount. Besides, bankers said the switch to discount was partly on account of the absence of hedging by importers and corporates on their external commercial borrowings.

Unhedged exposure

In fact, most corporates have preferred to leave their debt service obligations unhedged, anticipating a weakening of the dollar. The anticipation stemmed from expected large cross border inflows into the country, as some Asian sovereign funds and institutional investors began unwinding their US dollar treasury investments and shifting part of their investments into rupee-denominated investments, which included government securities.

The shifts were partly driven by the steep cut in US interest rates, which brought key Federal Funds rates down to 3 per cent last month-end. The reduction brought down one-year yields in US treasuries to about 2.10 per cent. On the other hand, one-year

Government securities in the domestic markets are currently about 7.4 per cent. The flows have resulted in the Securities Exchange Board of India raising the G-Sec investment ceiling for FIIs to $3.2 billion last month-end from $2.6 billion.

RBI intervention

Net FII inflows into equity and debt between February 4 and February 8 this year were $1.16 billion. Besides, bankers said the inflows are also evident from strong interventions by the RBI in the foreign exchange markets. Most of the RBI’s purchases were through swaps for liquidity management.

This implied that the RBI bought spot and at the same time sold forward dollars for up to one month. Bankers said that the swaps also partially contributed to the dollar moving into a discount for one and three months.

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