How to handle rupee volatility as coronavirus hits global market

March 23, 2020 10:48 AM

Exporters having underlying orders which are unhedged should hedge the entire amount by forwards or options.

rupee, forex, inr vs usd, investors, traders, hedge fundsSeveral countries around the world including India’s major export and import trading partners have shut their land borders, seaports and airports for entry of foreigners.
  • Abhishek Goenka

Indian exporters are going through dire times and are in a very precarious situation as exports to its major trading partners have taken a major hit due to coronavirus outbreak becoming a pandemic. Several countries around the world including India’s major export and import trading partners have shut their land borders, seaports and airports for entry of foreigners. Even though major countries have not put trade restrictions, business of non-essential items have taken a major hit. Global supply chain has collapsed with stoppage in cargo movement. The international shipping lines are affected.

Indian Rupee has depreciated by 5.72% against the US Dollar since start of 2020 from 71.22 to touch an all-time high of 75.31. Under such dramatic circumstances, Indian exporters are advised not to cancel but to take delivery of near term hedged contracts as mark to market losses will be huge. Indian exporters, whose shipments are delayed due to the coronavirus effect, could avail PCFC to utilize their near term maturing forward contracts.

Going ahead, exporters who can undertake only forward contracts, should hedge their open FX exposures up to a minimal percentage or lower range of their pre-defined policy hedge ratio of projected receivables to take advantage of attractive forward rates. Annualized Dollar Rupee Forward premiums have risen by 0.50% on an average to 4.50% from 1st March 2020 till 20th March 2020, thanks to sharp interest rate cuts by the US Federal Reserve, thereby widening the interest rate gap.

Exporters who can carry out options should look at Risk Reversal strategies as the implied volatility for US Dollar Rupee has risen from 4% in January 2020 to 9% in March 2020. In such volatile times, exporters should consistently monitor their hedge performance, before deciding on future hedges. If the rupee continues to depreciate sharply, further hedges can be taken at gap out levels but not beyond the minimum pre-defined hedge percentage. Forward contract hedges can be enhanced if concrete positive developments take place around the world with the containment of the fast-spreading coronavirus, as likelihood of rupee appreciating against the US dollar could be high.

Exporters having underlying orders which are unhedged should hedge the entire amount by forwards or options with downside protection and market participation up to an extent in order to safeguard benchmark costs and profit margins.

Importers should take back to back hedges against underlying exposure for the current and forthcoming month. Companies with exposure to unhedged foreign currency loans should hedge their near term interest and principal outstanding payments, and going forward, should evaluate the cost-effectiveness of their loans and take hedging calls accordingly.

Also, FEDAI has given relaxations in submitting underlying. The RBI has approved time of up to 60 days or date of maturity of contract whichever is earlier, for production of underlying documents by corporates. This would be applicable for the contracts booked from February 15, 2020, to April 15, 2020. This period may be reviewed/extended based on the evolving situation. Also, if contracts are cancelled post the maturity date within 3 days, gains will be passed on as opposed to earlier. Relaxation has been granted for submission of monthly/quarterly returns related to forex hedging till April 30, 2020, and may be submitted with delay thereafter.

Abhishek Goenka is Founder and CEO, IFA Global. Views expressed are the author’s personal.

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