The onshore three-month forward premium implied yield was down to 7.91% on Wednesday from as high as 8.54% two months ago. The one-year rate has dropped to 7.62% from 8.25% two months back. The onshore premium for booking dollars at a forward date has fallen across tenures due to expectations of a stable currency ahead and a likely fall in interest rates, bankers said.
Bankers said corporates must grab this moment to hedge as the main concern for not buying protection against currency volatility was the high premiums.
Corporate should definitely hedge right now given the fall in premiums. Banks are already putting pressure on clients to hedge as we have to otherwise keep aside capital for clients unhedged exposures under RBI norms, said NS Venkatesh, head of treasury, IDBI Bank.
In September, the RBI governor had warned that companies were putting themselves at great risk by keeping foreign currency exposures unhedged. Deputy governor HR Khan had pegged the unhedged exposure at a whopping 85%.
But some companies, especially exporters, are increasing their hedges -- one of the reasons the premiums have fallen in the first place.
Exporters book contracts to sell the dollar at a future date, which increases the dollar supply in future and brings down premiums. To the extent that some exporters have increased their hedges, the premiums have come down, said Hitendra Dave, head of global markets, HSBC.
Meanwhile, the sharp fall in premiums has lured foreign investors to put more dollars into Indian bonds as hedging has become cheaper. Foreign institutional investors have already pumped $22 billion into the Indian debt market and are likely to bring in another $2-3 billion in 2014.
With the hedge cost working out to around 6-7% (both offshore and onshore), FIIs can get a return of minimum 2% on Indian bonds. Dollar/rupee non-deliverable forwards are at a near three-month low with the three-month NDF implied yield (premium adjusted to global interest rates) at around 5.60%. Most foreign investors prefer to hedge in the NDF market while few buy onshore forward contracts, dealers said.