Small enterprises can now hedge forex risk

MONETARY POLICY 2007-08/ TOWARDS CONVERTIBILITY

For small and medium enterprises, the credit policy has brought much needed relief with SMEs being allowed to hedge foreign exchange risk without reference to their previous export records.

With around 15 per cent of the SMEs exporting directly and nearly twice that number exporting indirectly, the move is expected to benefit smaller companies which were typically unable to hedge their forex risks. Most SMEs, at present, take the export credit guarantee route to hedge their currency risks.

Said R Y Angle, president Priya Chemicals and former chairman of the Confederation of Indian Industry's SME cell, "RBI's move will help the smaller exporters hedge their currency risks directly and the fact that they can cancel or rebook a contract as and when they require will give them operational flexibility." Angle added that with the RBI allowing SMEs to book currency contracts without reference to past export records would also allow first time exporters to avail of the facility.

Added Moses Harding, head of treasury at IndusInd Bank, "Most SMEs do not have in-house infrastructure to mange multi-currency balance sheet and have seen their profits being eroded as a result of the rising rupee."

The RBI's move to allow hedging will help them be guarded against volatile currency movements.

The banking regulator also said that regulatory norms for the Small Industries Development Bank of India will be the brought on par on with other commercial banks which is expected to make for easier flow of money into the sector.