The euphoria over the depreciating rupee aiding the rise in earnings of Indian exporters is likely to be capped, since the exchange rate for the local currency against the greenback has fallen beyond rates at which most of these firms have taken hedges.
On the other hand, importers, especially the smaller ones, are preparing themselves for a crisis, since the weak rupee is likely to erode their earnings.
The rupee moved closer to its two-year low on Wednesday, touching 48.01 in intra-day trade. It closed at 47.65—a 16-month low. "This move (rupee’s fall) from 46 to 48 has largely caught the market by surprise. If the rupee keeps on weakening and stays at 48-49 levels for, let's say, the whole of next year, only exporters would benefit. But if this is temporary—for a few weeks—they are unlikely to make significant gains," said Gopal Bhattacharya, managing director and head (global markets), Societe Generale, India.
With other factors remaining constant, when the rupee falls by one per cent, the margins of exporters like technology firms typically rise by 40-50 basis points. This is because these companies earn their revenue in foreign currencies.
Industry players and analysts said most exporters have hedged a part of their foreign currency receivables at 45.50-46.50 levels. As the rupee has breached this range and fell further, the incremental benefit on their margins from rupee depreciation would disappear. "Now, markets are giving them the rate of 49 for one year. That is no one's gain, because importers are uncovered and exporters are covered, though not 100 per cent. They might benefit to some extent, but not 100 per cent," said Abhishek Goenka, chief executive, India Forex Advisors, a foreign exchange consultancy firm.
Some players have revised their hedging strategies and taken contracts on floating rates to tide over the volatility in exchange rates. "We had revised our hedging strategy to go with a floor rate, participating in the rupee depreciation. Hence, we don't foresee this volatility affecting our earnings," said M B Chinappa, vice-president (finance), Biocon.
For importers, the scenario looks bleak, since they have to spend more to purchase equipment and raw materials from foreign markets. "Importers are really panicky. The worst part is that there is no buyer's credit (credit available to importers from foreign lenders) available in the market. Whatever interest they had saved, would be wiped out because of the weak currency. They are not getting fresh buyer's credit, even if they want to roll over," said Goenka of Forex Advisors.