As the rupee tumbles to record lows, Anil Jain, the chairman of a company which dismantles old ships, is in a bind: like many of the country's many small and medium-sized firms, his only way to hedge foreign currency risk is hope.
His company, Atam Manohar Ship Breakers, bought a ship in February for $6 million when the local currency was close to its peak for the year at 49 to the dollar.
He now faces installment payments in July and August, with the rupee recently hitting a record low of 57.32 to the dollar.
"Everybody is worried. The forward premiums are very high given the rupee volatility. So we are waiting and watching to see if the rupee recovers," said Jain, whose unlisted company breaks down ships in Gujarat and sells them for scrap.
Jain expects to book a foreign exchange loss of Rs 1.5 crore in the April-June quarter, not good for a company with turnover of only Rs 100 crore.
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The rupee's tumble and the surge in volatility is raising fears among policymakers and investors that smaller Indian companies are not adequately hedged, especially those with large overseas borrowings due for redemption in coming months.
Tight RBI regulations and deep-seated misgivings over forex derivatives have made companies shy away from even plain vanilla option contracts that treasurers say would provide an effective tool to counter currency volatility.
About 60 percent of corporate India's non-trade related exposure remains unhedged, while the proportion of uncovered exposure for trade loans was at 40 percent as of the end of March, the Indian Express newspaper recently reported, citing a RBI report sent to the government.
That's a significant number in a country where companies raised $30 billion via overseas borrowings in 2011, and where the rupee has fallen nearly 15 percent from 2012 highs in early February to become Asia's worst-performing currency.
"The hedging culture in India is still largely driven by motive to make money out of the exchange rate rather than pure business decisions to protect your core margins," said Subramanian Sharma, director at Greenback Forex, who advises small and medium companies on forex management.
"In short, it is the greed motive," he added.
Small companies are not the only ones facing losses: large ones such as Cairn India , Tata Power , Chennai Petroleum Corp , and Varun Shipping each reported forex losses of over 1 billion rupees in the quarter ended March.
'Once bitten, twice shy'
The most immediate source of pressure is likely to come from outflows to redeem overseas convertible bonds maturing this fiscal year, which Edelweiss Securities estimates will total $4.4 billion.
The redemptions are due when the rupee is at record lows and share prices are well below the conversion prices.
Edelweiss says most of this exposure is unhedged and expects mark-to-market losses of 83.1 billion rupees as of the end of May could turn to actual losses.
Trade finance is another potential danger spot. Most Indian importers borrow at lower interest rates from overseas. They pay this back with a lag and are often unhedged.
Treasurers and forex advisors are advising companies to hedge via simple options, but are finding a sceptical audience.
Indian companies, particularly smaller ones, have shied away from using even basic hedging tools, scarred by their 2007-2008 experience when complex structured products, many of which were tied to the Swiss franc, led to widespread losses.
That led to a spate of lawsuits by small companies against banks that sold the complex structured products.
Having eschewed complex derivatives after being hurt a few years ago, MindTree , a mid-sized technology company, saw an FX loss of $830,000 in the January-March quarter,
"In our case, it is a little bit of a once bitten, twice shy," said Chief Financial Officer Rostow Ravanan.
Ensuing lawsuits spurred the Reserve Bank of India to tighten regulations, including banning popular option structures requiring no up-front premium payment, which companies had used to hedge their FX exposures.
The RBI's recent directive to ban exporters from cancelling and rebooking forward contracts when they are in the red has also dampened demand for derivatives, as it can saddle a company with quarterly mark-to-market losses from FX exposure.
Though exporters benefit from a falling rupee, a sudden rebound could threaten to spark losses.
"Due to the Reserve Bank's policy of not being allowed to cancel and rebook forward contracts, corporates are far more cautious while getting into forward contracts," said Rafeeque Ahmed, president of the Federation of Indian Export Organisations.
Cost also remains an issue. Many importers that have remained unhedged now find the cost of buying dollars in the forwards market too expensive.
Buying a one-year option now translates into an upfront payment of around 1.25 rupees per dollar because of intense market fluctuations, as indicated by volatility indexes.