Raising concerns about the unhedged foreign exchange exposure of Indian companies, H R Khan, deputy governor of Reserve Bank of India (RBI), has urged them to manage the potential risks.
“Regulators certainly will not like to micromanage what otherwise is a commercial decision, corporates need to take care of the potential risks embedded in their unhedged currency exposures, since they might incur significant costs due to unexpected and sudden exchange rate movements,” Khan said at an event organised by the Confederation of Indian Industry here on Tuesday.
In the past calendar year, corporate groups were reluctant to hedge a significant portion of their foreign currency exposures because of the rupee’s stability against the dollar.
“Large corporate leverage is being quoted as a matter of concern for financial stability… When we talk about the un-hedged exposure issue, it is not only a threat to individual firms and entities but a concern for economic and financial system from a stability point of view,” said Khan.
He added it might turn out to be a significant cost for companies owing to the unexpected exchange rate movements.
The US Federal Reserve is expected to start increasing interest rates in 2015. This could pose a challenge for emerging markets economies such as India since foreign investors might start selling assets in India, leading to weakness in the rupee against the dollar.
According to the latest RBI data, foreign exchange reserves rose to an all-time high of $328 billion for the week ending January 30, 2014. “Foreign currency reserves have improved. Right now we are at about $330 billion, the highest ever. But there is also a view that no amount of foreign exchange reserves can cushion when there is extreme volatility or external shocks. That, too, here we are talking about nations. You can imagine how vulnerable corporates can become if they have too much of foreign currency exposures,” said Khan.
However, he acknowledged that India was better prepared to face external shocks. He also agreed macroeconomic vulnerabilities in the country's economy have significantly receded due to the high growth, contained current account deficit, lower inflation and high forex reserves.
In 2013, when the US Fed had hinted at tapering, Indian markets had huge outflows from foreign investors.
As a result, the rupee had weakened to record lows. According to RBI data, foreign exchange reserves had touched $274 billion on September 6, 2013 – a 39-month low.
“But one cannot be complacent. If another round of Quantitative Easing unwinding happens, we would be the last to be affected... (But we) can't afford to be complacent and we should be prepared to face vulnerability,” said Khan.
“At this juncture, India cannot afford to lose the great opportunity it possibly got over so many years – its strong position among emerging countries,” Khan added.
According to Khan, one challenge corporates might face in terms of raising resources will be about how they respect their credit payment commitments. “It is likely that in days ahead, they (corporate) will experience enhanced scrutiny of credit decisions of banks by depositors, tax payers, market analysts, and of course shareholders.”
With massive fluctuations in currency, there might be a case for even non-financial companies to undergo stress tests. “Going ahead, non-financial companies might think of some kind of stress-test which financial firms do,” he added.
Khan believes that in the financial sector, there is a need to look into the extant IT environment, since there is a feeling that the IT infrastructure at most financial firms is fragmented and inconsistent. "The financial sector industry rests on trust and credibility, and increasing cybercrime is threatening this basic premise," he said.
“Regulators certainly will not like to micromanage what otherwise is a commercial decision, corporates need to take care of the potential risks embedded in their unhedged currency exposures, since they might incur significant costs due to unexpected and sudden exchange rate movements,” Khan said at an event organised by the Confederation of Indian Industry here on Tuesday.
In the past calendar year, corporate groups were reluctant to hedge a significant portion of their foreign currency exposures because of the rupee’s stability against the dollar.
“Large corporate leverage is being quoted as a matter of concern for financial stability… When we talk about the un-hedged exposure issue, it is not only a threat to individual firms and entities but a concern for economic and financial system from a stability point of view,” said Khan.
He added it might turn out to be a significant cost for companies owing to the unexpected exchange rate movements.
The US Federal Reserve is expected to start increasing interest rates in 2015. This could pose a challenge for emerging markets economies such as India since foreign investors might start selling assets in India, leading to weakness in the rupee against the dollar.
According to the latest RBI data, foreign exchange reserves rose to an all-time high of $328 billion for the week ending January 30, 2014. “Foreign currency reserves have improved. Right now we are at about $330 billion, the highest ever. But there is also a view that no amount of foreign exchange reserves can cushion when there is extreme volatility or external shocks. That, too, here we are talking about nations. You can imagine how vulnerable corporates can become if they have too much of foreign currency exposures,” said Khan.
However, he acknowledged that India was better prepared to face external shocks. He also agreed macroeconomic vulnerabilities in the country's economy have significantly receded due to the high growth, contained current account deficit, lower inflation and high forex reserves.
In 2013, when the US Fed had hinted at tapering, Indian markets had huge outflows from foreign investors.
As a result, the rupee had weakened to record lows. According to RBI data, foreign exchange reserves had touched $274 billion on September 6, 2013 – a 39-month low.
“But one cannot be complacent. If another round of Quantitative Easing unwinding happens, we would be the last to be affected... (But we) can't afford to be complacent and we should be prepared to face vulnerability,” said Khan.
“At this juncture, India cannot afford to lose the great opportunity it possibly got over so many years – its strong position among emerging countries,” Khan added.
According to Khan, one challenge corporates might face in terms of raising resources will be about how they respect their credit payment commitments. “It is likely that in days ahead, they (corporate) will experience enhanced scrutiny of credit decisions of banks by depositors, tax payers, market analysts, and of course shareholders.”
With massive fluctuations in currency, there might be a case for even non-financial companies to undergo stress tests. “Going ahead, non-financial companies might think of some kind of stress-test which financial firms do,” he added.
Khan believes that in the financial sector, there is a need to look into the extant IT environment, since there is a feeling that the IT infrastructure at most financial firms is fragmented and inconsistent. "The financial sector industry rests on trust and credibility, and increasing cybercrime is threatening this basic premise," he said.
