India Inc sitting on unhedged FX pile

India Inc is sitting on a huge unhedged foreign currency exposure. Senior bankers said Indian corporates have over Rs 47,500 crore of foreign currency borrowings but their bullishness on the rupee has kept them away from hedging their currency risk.

"They are running a big risk. If the rupee depreciates, these companies will take a hit," said a foreign exchange dealer. Some of the companies have started hedging their foreign currency receivables.

The depreciation of the rupee in the last one month has not dented corporates' confidence that the currency would continue to be firm against the dollar.

The rupee has depreciated nearly 2 per cent to Rs 44.03 per dollar from a high of Rs 43.20 in July when the Chinese government revalued yuan and pegged it to a basket of currencies.

In 2005, the rupee has moved between 43 and 44 per dollar. The rupee is overvalued by 10 per cent going by its current real effective exchange rate (REER), though its down from 12 per cent in a couple of months ago.

Dealers foresee a bearish undertone for the rupee in the short term. But the Indian unit is expected to gain over the long term as the US greenback is likely to be weighed down by US government deficits and the influence of the euro in the global markets.

Bankers said corporates have made huge savings on hedging costs by taking a calculated risk because of a stronger rupee and these gains will offset any loss in the event of the rupee deprecating sharply.

IDBI Bank's head-foreign exchange & money markets, U Venkataraman, said "The rupee looks strong, given the sound fundamentals like robust foreign direct investment and FII inflows, coupled with growing exports and invisibles. However, price of crude oil price continues to be an area of concern."

Typically, corporates review their hedging strategy periodically. Each company follows its own policy, based on their net forex receivables and risk propensity.

Exim Bank's executive director S Sridhar said when the rupee becomes extremely volatile, some corporates open up 50 per cent of their positions. Corporates with exports in excess of imports, however, enjoy a natural hedge.