Given that companies today operate in a climate of increased global economic volatility, it is critical they hedge their exposure to foreign exchange risk, the Reserve Bank of India has said.
According to data from commercial banks compiled by RBI, the unhedged exposure of companies as a percentage of total exposure increased from 5.1 per cent as on December 2008 to 25.4 per cent as on March 2009.
“As this was a period of heightened volatility, unhedged exposures can impact the health of the corporate sector and translate into increased credit risks for the banking sector,” the report said.
The easy liquidity conditions and depressed risk premia in global markets before the onset of the crisis prompted many of these to explore cheaper sources of funding overseas.
A lot of Indian companies opted for foreign currency loans thought the External Commercial Borrowing route (ECB). They also sought to raise equity in foreign currencies by listing their shares on overseas stock exchanges in the form of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Indian companies have borrowed $15.16 billion (Rs 69,440 crore)from markets abroad so far during the current financial year, as compared to $16.8 billion (Rs 76,950 crore) borrowed during the same period last year. Both figures, though, pale in comparison to the $25.62 billion (Rs 117,350 crore) borrowed during the same period in 2007-08.
However, there has been a tendency among Indian companies to leave their foreign exposure unhedged.
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To discourage this tendency, banks have been told their Board policy should explicitly recognise and take into account risks arising from unhedged foreign exchange exposures of all their clients.
Further, for arriving at the aggregate unhedged foreign exchange exposure of clients, banks’ exposure from all sources including foreign currency borrowings and ECBs should be taken into account.