Comments
Companies with export earnings may have to take on higher currency risk , following the RBI's new rule on EEFC (Exchange Earner's Foreign Currency) account balances.
This rule mandates that at least half of the export earnings that companies remit to India must be immediately converted into rupees.
In recent times, exporters were typically benefiting from a weakening rupee by holding on to dollar balances for as long as they could. But the RBI's new move will force them to convert half of their export earnings into rupees.
RBI data showed that EEFC accounts with Indian banks held $3.53 billion in balances as of September 2011. Forex dealers, however, estimate that the balances could be close to $5 billion now.
This implies that dollar holdings amounting to roughly $2.5 billion may have to be converted into rupees within a fortnight.
This, along with the ongoing requirement of converting half the export earnings into rupees, is expected to reduce demand for dollars in the domestic market and ease some pressure on the rupee.
An analysis of forex earnings of the CNX 500 companies suggests that software companies, for whom nearly 79 per cent of combined sales are in foreign exchange, Indian pharma companies (Dr Reddy's, Lupin, Divi's, Ranbaxy), gem and jewellery exporters (Rajesh Exports, Shrenuj) may be impacted by the move. The RBI's circular stipulates that exporters have to convert 50 per cent of their existing balances as well as new earnings flowing into EEFC accounts into rupees. What is more, if they have payments to make towards imports or other expenses, they cannot tap the market for fresh dollars. They first need to draw down the balance in their EEFC account to make these payments.
Implication
This has three implications for the large forex earning companies. One, a larger proportion of their revenues will now be quickly converted into rupees.
This does away with the possibility of these companies making gains from a depreciating rupee in the period between the receipt of revenues and the conversion into rupee in the EEFC account.
Explains Mr Rohit Bammi, Partner, KPMG: “It was perceived that many exporters were hoarding dollars and drawing fresh dollars for imports. The circular will curb this practice as companies will have to necessarily draw down on the dollar balance in their EEFC account before borrowing afresh for trade credit in dollars.”
Two, export earners who also have a high import bill may see some of their natural hedge against currency risks eroded.
If they were earlier hanging on to dollar balances and meeting their payments out of them (thus bearing no currency risk), they will have less leeway on this now.
Three, more frequent currency conversions may increase transaction costs for exporters.
However, Mr Bammi points out that companies that have a large overseas presence typically also have subsidiaries overseas, with their own bank accounts. These balances can continue to be held in dollars. Companies with overseas subsidiaries who deal with clients may not be affected by this circular.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.