Exporters go long to cover Re effect

Forward contracts for three to five years being struck to curb impact of appreciating rupee.

The unrelenting rupee rise is forcing exporters to take the unusual step of covering their foreign currency risks over a longer term of three to five years.

Normally, foreign currency exposures are covered for a maximum of a year, but now exporters are contracting forward contracts for three-five years to curb the impact of an appreciating rupee on their profits.

These long-term contracts are benchmarked to the Mumbai interbank forward rate (MIFOR), which is the implied rate for three or five years based on six-month forward rate for dollars.

Forward rate is the rate agreed to by two counterparties to a forward contract for a foreign currency with payment at a future date.

Another category frantically covering foreign currency exposure is the set of companies which have raised external commercial borrowings. This has triggered a two-way interest in the forward market, both from exporters receiving dollars and companies needing to pay dollars in future.

The heightened activity in forwards market has led to the MIFOR hardening "" from 6.45 per cent to 6.65 per cent for three years and from 6.50 per cent to 6.90 per cent for five years. This is the rate of interest an importer or exporter would be required to pay based on the current spot dollar rupee exchange rate.

Hedging of commodity exposures has also risen sharply with volatility in global markets. Commodity hedging by Indian companies is in vogue following high volatility in the base metal prices.

This has been possible since the RBI has allowed Indian companies to hedge their exposures in commodities in the international exchanges. According to bankers, the hedging is mainly done in the international market, facilitated mainly by those banks which have presence in India to a large extent.

The companies are mostly hedging positions in base metals such as copper, zinc, aluminium, and gold. Incidentally, aluminium prices have fallen by 15 per cent since June from highs of $2775 per tonne to $2350 per tonne.

While gold prices have risen by 7 per cent from $662 per ounce to $710 per ounce, there has been a 24 per cent fall in zinc prices from $3710 per tonne to $2791 per tonne.

Bankers with foreign banks said commodity hedging was being done through buying of futures in overseas exchanges and striking structured options in the over the counter markets.

In a futures contract, a company is obliged to buy or sell while options contract gives it the right to either buy or sell with no obligation to do so.