The foreign exchange derivatives contracts entered into by Indian companies in the last two to three years has starting taking its toll now on companies? performance on the back of continued depreciation of the rupee against the dollar.
The performance of the BSE 100 companies has been far worse with aggregate forex losses of around Rs 43,000 crore comprising mark-to-market (MTM) loss on forex loans and outstanding forex derivative contracts which accounted for 21.4% of the reported profit before taxes, according to a recent Edelweiss Report.
However, the impact went unnoticed because of some crucial changes in accounting norms last year allowing these losses to be kept off the profit and loss statement.
During 2007, companies entered into derivatives structures to reduce their interest costs. Many companies had opted for dollar loans. The appreciation of the rupee eroded the revenues and profits of exporters as they made fewer rupees for every dollar earned abroad. On the other hand, they had to service the dollar loans, on which they incurred a higher interest outflow.
Of this number, mark-to-market (MTM) losses, which mainly relate to forex derivatives contracts, aggregated Rs 24,300 crore. The numbers were arrived at from individual disclosures by these companies in their annual reports, the Edelweiss report said. These losses could be in multiples if one considers all the listed and unlisted companies in India which had bought forex exchange derivatives from a clutch of banks during 2007 and 2008.
The main reason for such huge losses was depreciation of the rupee against dollar in 2008-09. Edelweiss now expects that the appreciating rupee will lead to paring of these MTM losses for Indian companies.
For every 10% appreciation of the rupee, aggregate MTM gains during the current financial year (FY10), for the BSE 100 companies, will be about Rs 12,200 crore, it said.
Factors such as market liquidity, investor behaviour, regulatory structure and tax laws will have a heavy bearing on the behaviour of market variables in this market.
Experts believe that increasing convertibility on the capital account would accelerate the process of integration of Indian financial markets with international markets.