Hedging plans go awry with forex fluctuation

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Mumbai, Oct 4: Wild foreign exchange fluctuation has been taking a toll on India Inc and has not only caused losses, but also created a huge confusion over the hedging solution. A study of 166 large companies carried out by FE indicates that direct losses due to foreign exchange fluctuations have grown 187.25% in FY08 over the previous year.

And in the current year, the losses are expected to mount further as many hedging strategies have gone awry. Export associations think over half of the exporters had hedged their positions at Rs 41-42 against the dollar and were expecting a strong rupee to persist. After all, the rupee had moved from Rs 43 levels to Rs 39 levels in FY08. However, the global meltdown and the subsequent sell-off by foreign institutional investors to the extent of $9.2 billion this year has seen the currency depreciate by 17% in the first half of FY09.

Both exporters and importers are concerned about the uncertainty caused by the volatility and don’t know what the optimal hedging position would be. “Should we buy in the futures market, should we sell, or keep our positions unhedged, these are the questions that are boggling us,” says Suraj Tandel, CFO with a medium-sized exporting outfit.

Even pricing issues get complicated due to the volatility. This is because a certain level of exchange rate range is used in arriving at a competitive price in the international market. With such fluctuations, getting to an optimal pricing structure and then pitching in the global markets is becoming exceedingly difficult, say exporters.

The FE study reveals that the impact of the fluctuations has been prominent amongst small-and medium-cap companies. Though some of the biggies have been caught in the cross fire too.