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Bullish exporters hedge rupee for longer term

ET Bureau|
Updated: Jan 18, 2018, 08.43 AM IST
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Rupee--reuter
They look to protect receivables against appreciation of rupee against the dollar
MUMBAI: Indian exporters are buying currency forwards of much longer duration, stretching to 24 months from the usual coverage of up to a year, to hedge their receivables and boost treasury gains.

The reliance on longer-term derivative contracts, which require higher premiums, reflects the deployment of hedging strategies that would enhance treasury gains, while protecting their receivables against sharp appreciation of the rupee against the dollar. "Many companies are now looking at long-term forwards, expecting a stable rupee," said KN Dey, founder, United Financial Consultant, a forex advisory firm. "This should help them increase their treasury gains." For instance, companies are seeking 18-month contracts where they would receive a Rs 4 premium, with the rupee pegged at 68 to a dollar. If the rupee trades at 65 at the end of the period showing little volatility, the contract buyer will earn at least three rupees premium, enhancing treasury gains.

"With an appreciating trend, the exporters stand to lose out on export competitiveness in the coming days," Dey said. The rupee has gained nearly 6 per cent in 2017, reversing the 2016 trend. To be sure, the local unit is under pressure since the beginning of 2018 because of several domestic and global factors. It ranked 20 among the emerging-market currencies this year in terms of spot returns. It closed at 63.89 a dollar, up 0.23 per cent.

However, the currency may gain after the Union Budget on expectations that foreign direct investments (FDI) would increase.

Traders expect FDI flows to accelerate after New Delhi eased ownership rules in industries as diverse and capital-intensive as retail, civil aviation, and realty. "If the rupee rises sharply, many exporters will be out of business," said Abhishek Goenka, CEO of IFA Global. "This fear has prompted many exporters to book even much longer term contract like 18 to 24 months to cover their long term cash flows and business expectations. We are suggesting long term contracts to all our exporter clients only if they have certainty in their business expectations."

A sharp increase in the rupee's value will generate gains for them while a dip is unlikely to impact them much as exporters will be covered at 66 to 68 levels, which manufacturers are comfortable with.

"Any major depreciation like a 70 will improve overall business profits. So they are taking a calculated risk," Goenka said.

rupee- snip

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