However, the market sentiment has shifted now. The Reserve Bank of India officially admitted that the rupee was overvalued, causing the rupee to slip to 36.7 before settling down at 36.2 to 36.3. FII inflows, which account for a significant portion of the dollar inflows, have slowed down after the Asian markets debacle. Moreover, the crisis has resulted in dollar inflows from other sources like NRI deposits too slowing down. This further pushed the rupee to the present levels of 37.47.
Corporates were caught napping as they borrowed dollars when the exchange rate was 35.7 to 35.9. Now that it is time to repay and the exchange rate is 37.47, this will be a shock for those which did not hedge their exposures. The turmoil in the forex markets has proved one point Indian corporates are penny wise pound foolish.
They try to following a profit maximising strategy instead of a loss minimisation strategy with respect to their forex exposures. While this may have proved profitable in the past the strategy backfired this time. If only corporates had hedged their positions fully in the April-August period when six month forwards were at 3.5-5 per cent, they would have been sitting pretty now.