Faced with higher forward premiums, banks are encouraging companies to hedge their forex exposure through slightly cheaper dollar/ rupee options, which provide a cushion against sharp volatility, says Ananth Narayan G, regional head – financial markets, South Asia at Standard Chartered Bank. Speaking to Aparna Iyer, Narayan said higher premium and a stable rupee have kept companies from hedging their exposures. Excerpts
Has RBI been intervening aggressively in the forex market?
Since the beginning of the year, RBI has bought $70 billion through both spot and forwards. If they had not intervened, the rupee would have appreciated a lot more than it has. The numbers show the extent of intervention.
But intervention does have unpleasant consequences?
While we cannot fault the RBI for intervention, there are consequences because of the monetary and forex policies of RBI. The market has become complacent on the currency pair. That can be a trap as the expectation is that RBI will protect the rupee and keep it in 60-62/$ range. Combining this with the high interest rates and high premiums, it is difficult to get importers to hedge.
How do you, as banker, urge clients to hedge?
Given that the interest rate differential is high, it serves as a natural incentive for exporters to hedge and importers not to hedge. One way in which we are recommending clients to get a hedge is via buy options. The client can enter into structures wherein if dollar/rupee goes up sharply, the client is not caught unaware. It is like buying insurance.
How has the options market developed?
The good news is that options are used by the end users and not just speculators. Because interest rate differentials are high, companies borrowing through ECBs are buying protection through options because it works out cheaper as forward premia are high. We are even seeing long-tenure options being entered into. However, market has still not grown in terms of a liquid interbank market and we are not seeing transparent trades.
Does the futures market serve as a tool for hedging?
There is a dichotomy between the exchange traded and over-the-counter derivatives market in India. The OTC is a controlled market as there are requirements of auditor’s certificate, compulsory underlying asset and so on. But in the futures market, there is no such requirement.
I think this dicotomy of regulation must be done away with. There is a clear regulatory arbitrage here. Because there is no requirement of underlying in the futures market, frankly it is a party there.
Given the high interest rate differential, do you think FII flows will continue?
I think they will. We are seeing overseas players setting up investment limits in corporate bonds since the government bond quota is over. Because interest rates in India are highest among major countries, the outlook on the rupee is stable, we will see investors getting attracted to markets here.
Until such time that interest rate differentials remain in favour of India, flows will continue.
Do you think FII investment limit in debt must be increased?
I think the debt limits should be increased. As a country, we need dollars to fund infrastructure and growth. The inflows have to be a mix of all kinds of flows. Even if the money comes into government debt, it frees up the domestic banking system for it to flow into private sector. So FII investment in government bonds doesn’t mean that the money is going only to the government.
What are your expectations from the RBI policy?
Inflation expectations have come off, crude prices are lower and we have had food prices coming off. We expect the November print to be well below 6%. But I don’t expect a rate cut in December given the language of RBI in the past policies. RBI wants to be sure that the fall in inflation is sustainable beyond base effects. Perhaps in February, there is a better chance of a rate cut.