With rising volatility in currency markets in the wake of the debt crisis engulfing Europe, banks have begun to ask Indian exporters to fully hedge their earnings in euro, pound sterling and Swiss franc.
Bankers said markets had become more volatile in recent weeks, even though the European Union (EU) and the International Monetary Fund were working overtime to fashion debt recast packages. Europe accounts for about 21 per cent of India’s exports.
The euro slumped to its lowest in almost 14 months against the dollar as European Central Bank (ECB) President Jean-Claude Trichet said the bank didn’t discuss government bond purchases, as the region’s fiscal crisis spread.
The euro fell below $1.27 for the first time since March 2009, as the ECB kept its main refinancing rate at a record low of 1 per cent at today’s meeting. Greece’s finance minister said the country didn’t have the money to repay debt due this month.
Satyajit Kanjilal, chief executive of Forexserve, a foreign exchange advisory firm, said the rupee had strengthened against the euro. Hence, exporters doing business through the euro should sell the currency. It is losing value, meaning exporters earn less in Indian currency. Many of them who have not hedged their position (in euro) may be hit by the weakening currency.
A senior State Bank of India official said our exporters did not enjoy high profit margins to keep currency risks open. “The play with currency risk can mean hard knock to the bottom line”.
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Three years ago when the dollar was weak, some companies, including Indian information technology companies had to shift to billing clients in the euro.
The Swiss franc touched the highest level against the euro since the introduction of the common currency in 1999 on speculation the Swiss National Bank relaxed efforts to curb the currency’s rise.
On question of making a switch to invoicing trade transaction in the rupee instead of the euro, the treasury head of a large public sector bank said though the Reserve Bank of India and the government said that the Indian currency was convertible, it (rupee) still did not have enough acceptability for invoicing trades.
Using the rupee as invoicing currency means transferring currency fluctuation risk to customers. Most importers (from Europe) would not want to take such headache, said another senior executive working at the international banking desk of a large public sector bank.
Meanwhile, strong economic growth and domestically-funded fiscal deficit were likely to keep the country’s debt position stable even if the financial crisis in Europe worsened, a Citigroup report said today.
“Although India, with a fiscal deficit forecast at 8.5 per cent in 2010, may seem vulnerable to any worsening of the European fiscal crisis, its strong growth trajectory should ensure that its debt dynamics remain stable, while its deficit is primarily domestically-funded,” the report said.