The rupee volatility is giving treasurers both in banks and companies sleepless nights. While the dollar was fetching Rs 46.32 during the start of the year, by mid-April, the Indian currency had strengthened to Rs 44.40 and just when everyone was beginning to feel it would touch 43-43.50 mark, it started weakening once again. By mid-May, rupee had dropped back to Rs 47.70 and in one single day, on May 25, was cheaper by almost a whole rupee. Last Friday, the Indian currency had recovered to Rs 46.31, having lost nearly 4.3% in a single month in May. So far in 2010, however, the rupee has strengthened by almost 5.5% against the dollar on the back of 4.8% gain last year.
Recent movements in the rupee have little to do with local factors. The reason behind rupee losing ground is the turmoil that euro is into. The euro slipped to an 18-month low on May 14, following the fears of sovereign debt crises in the euro zone. Some of the weakness has been attributed to selling in the Indian stock markets?foreign institutional investors have pulled out more than $2 billion so far in May.
The course of rupee will continue to be determined by events taking place globally. Says Hitendra Dave, head of global markets at HSBC, ?I think it all depends on how the global markets pan out. Of late, the volatility and movement in the rupee has been very sharp and quick. We are waiting for the international markets to stabilise and only once that happens can we expect the rupee to see some signs of strengthening.?
Moses Harding, head (global markets), IndusInd Bank, observes, ?There is nothing fundamentally wrong with the rupee except for fears of FIIs pulling out from the stock market. It?s the bearish behaviour of the euro, which is falling as if there is no end, that?s causing the problems.? Harding expects the rupee to trade at 47.15-47.65 for the short term. Exporters are not complaining, especially those who may have left some of their earnings unhedged.
However, most companies do tend to hedge some portion of their exposure. Infosys, for instance, had, as of April, total hedges of close to Rs 2,300 crore. V Balakrishnan, CFO, said after the March quarter results that he expected the rupee to be highly volatile against the dollar.
To protect itself, Infosys is trying to convince clients to bear a portion of the risk. Balakrishnan said some had signed such pacts and would share up to 5% of the currency risk. Pune-headquartered Bajaj Auto doesn?t believe in taking any chances. Says Kevin D?Sa, CFO, ?About a fifth of our revenues are by way of exports and while a weaker rupee definitely helps us, we have hedged 80% of our exports for the current year at levels of 47 to the dollar.?
Also at GE Shipping, the management believes the weakness in the rupee may be temporary but is not willing to leave earnings unhedged. ?We keep hedging our revenues,a little bit at a time because it?s extremely difficult to forecast currency movements,? explains Ravi Sheth, director at the shipping firm.
A spokesperson from Sun Pharma, which does business in overseas markets, said, ?We are adopting a wait and watch approach. Our net exports in the current year would be in the region of $40-50 million and typically, we prefer to hedge six-months of our net exports and we stick to plain-vanilla forward covers. We will keep evaluating the currency movement and then take a call on our strategy.? The approach is the same at Marico, which hedges its exports earning through a mix of forward covers and plain-vanilla options. However, CFO Milind Sarwate has a point when he says it?s important not to do too much business in countries that have weaker currencies since the consolidated accounts are impacted because of translation of values. ?Although there is no cash outflow, the numbers do change, when the subsidiaries? accounts are consolidated with those of the parent company,? Sarwate points out.
