Updated January 9th, 2024 at 13:39 IST
Firms increase forex risk exposure in 2023 on RBI support
The decline in forward hedging was more substantial, ranging from 20 per cent to 25 per cent for some companies, particularly larger ones.
Importers and exporters opted for a larger share of unhedged foreign currency exposures, showing increased reliance on the Reserve Bank of India (RBI) to maintain the rupee within a narrow range. Reuters calculations based on Clearing Corp of India data revealed a 14.5 per cent year-on-year drop in forward contracts purchased by importers for hedging future foreign currency payments, while exporters' hedging declined by 12.5 per cent.
The decline in forward hedging was more substantial, ranging from 20 per cent to 25 per cent for some companies, particularly larger ones, according to a senior FX salesperson at a private bank. The individual noted that companies perceive reduced value in using forwards in the current environment.
The RBI's consistent intervention in both spot and forward markets played a pivotal role in minimising intraday swings and overnight risks on the rupee throughout 2023. This led to volatility expectations reaching 15-year lows, making the rupee one of the least volatile Asian currencies. The rupee maintained a narrow 3.5 per cent band throughout the year, including a mere 1 per cent band in the December quarter.
The stable FX environment and reduced carry, the return on holding a higher-yielding currency compared to a lower-yielding one, contributed to clients feeling more comfortable under-hedging. Ashutosh Tikekar, Head of Global Markets at BNP Paribas India, highlighted that the RBI's active currency management and ample forex reserves provide confidence to clients regarding the central bank's FX policy in the near future.
Looking ahead to 2024, Tikekar expressed optimism about continued RBI support, citing the substantial forex reserves pile. However, the low carry, particularly in the wake of the US interest rate hike cycle, poses challenges. The carry on the dollar/rupee pair dropped to a 15-year low in November, discouraging exporters from forward market hedging. Despite the incentive for importers to hedge more due to low carry, the stable currency environment has tempered their hedging enthusiasm, according to bankers.
(With Reuters inputs)
Published January 9th, 2024 at 13:39 IST