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: most corporates get quotes from them. The quote here is nothing, but the price at which they can buy or sell the currency at a future date. This is determined with the help of a number of factors including the demand-supply position of the currency, interest rate differentials and so on. But what makes the process a bit opaque is that there is no standard mechanism to discover price. This means that pricing can be a bit arbitrary with banks giving the best quotes to their most favoured clients, usually large corporate houses, choosing to ignore the rest. As Seshagiri Rao, director, finance, JSW Steel, says; “As a business plan, we are never dollar short, but long. It means our exports are more than our imports. We cover about 50% of our net dollar positions as a result of this. And yes, we do get good quotes from banks.”
For large importers too, the situation is no different as they get favoured status from banks keen to retain their business. Bharat Petroleum Corporation Ltd (BPCL), for instance, is a large importer of crude like other domestic oil and gas companies. Its director, finance, S K Joshi, says, “We have a huge dollar exposure on account of our imports. Our risk advisory team looks at how we can cover it. But yes, large firms do get the benefit of good quotes from banks, which may not be the case with small and medium companies.” V Kumaraswamy, chief financial officer of JK Paper Ltd, an importer of pulp for its packaging board business, says, “We are advised by various banks. I don’t find a problem. It is fairly competitive in my opinion.”
Though these executives, and indeed, most in large firms, are fairly comfortable with the existing system that is not the case with companies with a small turnover of Rs 100 crore or so. For them, currency futures is a much better way to hedge their underlying exposure because the costs involved are not steep. Moreover, the process is fairly simple, and above all, the price discovery mechanism is standardised over an exchange. This makes the system transparent, as pointed out by Apurva Mehta, associate director, business advisory services, KPMG. “Quotes will be readily available on the exchange,” he says. This will facilitate faster entry and exit of players as opposed to forward contracts, where due diligence tends to delay matters altogether....
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