Players leave positions open, fail to see currency phenomenon.
The sharp appreciation of the rupee has caught exporters on the wrong foot, as many of them kept their positions open or partly covered. Garment exporters, for instance, only partly hedged their positions (10-30 per cent), leaving the bulk of these open.
The rupee has been rising on the back of strong dollar inflow though it retreated a bit on Tuesday from its 19-month high on speculation that the central bank may have intervened to counter its rise. It closed the day at 44.47 to the dollar.
Subbramanian Sharma, director, Greenback Forex Services, estimates 60-70 per cent of the positions of many small exporters are uncovered. This underscores the trend that exporters are wary of hedging, as they have burnt their fingers on a few occasions.
Exporters lost money on complex forex derivatives, as well as on a wrong call they took last year. They sold their receivables forward at Rs 40-41 to the US dollar when the overwhelming view was that the rupee would appreciate, but it fell to the Rs 50-52 level.
“Exporters are wary of hedging as there’s scepticism and fear that the rupee’s appreciation may not last long,” said Sharma. Exporters had sold their sales for longer tenures, as the view was that the rupee would appreciate to Rs 34-35 levels. When they went to realise their sales six months or a year later, the rupee had reversed its course.
If exporters had sold their receivables forward at Rs 40-41, when they went to realise their sales, the rupee was ruling at Rs 48-49. Exporters were scared such a situation could repeat and, hence, did not hedge for longer time or higher quantities this time.
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“With so much volatility (both ways), exporters are no longer hedging for the long term, but only taking short-term covers for three to six months,” said Pushkar Bagga, senior vice president, Mecklai Financial. There’s an element of greed, too: Many exporters had hoped for something better, but found themselves in a situation they didn’t want.
The rupee has been rising on the back of strong dollar inflows. Between January and April 1, foreign institutional investors pumped in nearly Rs 43,000 crore into the Indian markets, with Rs 21,547 crore flowing into debt and the remaining into equities, according to the data released by the Securities and Exchange Board of India.
The rupee has appreciated 4.67 per cent in 2010, the second biggest gainer among the major Asian currencies, with only the Malaysian ringitt rising more. The rupee may further appreciate to Rs 44.20, if there’s panic selling by exporters who will feel they would be in a worse situation if they don’t capture the current spot rate.
“Companies that made foreign currency borrowings through ECBs or FCCBs will be happy as, in some cases, the foreign exchange gains could help them partly pay off interest on these loans,” said Kavish Arora, MD and head of corporate banking, Bank of America. While the top 100 companies in the country have a forex risk-management strategy in place, smaller exporters are still driven by greed and impulse.