Implications of Indian Rupee Appreciation for Treasury Managers in India
... SOME CHARACTERISTICS OF THE CURRENT RISE IN THE INDIAN RUPEE From an examination of the Balance of Payments situation of India and of RBI exchange rate policy, we can infer the following about the direction of the Rupee: a) On the whole the prospects for a rise in dollar supply are moderate, while prospects for a rise in dollar demand are high. Therefore, the rupee is unlikely to rise further. b) Rupee is most likely to stagnate. ... c) Thus, the current rise in Rupee is not a simple reversal of the decade long fall that preceded it. A common thread that runs through all these characteristics is that there is much more uncertainty about both the magnitude and the direction of change in the Rupee’s exchange rate vis-à-vis the dollar. Such uncertainty will affect all those companies in India, which have large foreign currency payables or receivables. ... ISSUES FOR EXPORT-ORIENTED INDUSTRIES Due to the appreciation of the rupee, the export-oriented industries face erosion in their dollar earnings, if they do not hedge the same. ... 100 Crores due to the appreciation of rupee so far. When the rupee was falling, these companies benefited from the fall. ... Now that rupee is rising, the exporters have to hedge by selling US dollars in the forward market. ... The direction of the movement of rupee is much more uncertain now. ... Due to the uncertainty surrounding the direction of the rupee, the companies would prefer to enter into these contracts late, so that they have a better take on the direction of the rupee. ... The choice of the hedge ratio (for export-oriented companies) will depend upon the probability of appreciation of dollar. ... Moreover, the market for currency options is not very active in India. ... ISSUES FOR IMPORT-INTENSIVE INDUSTRIES When the dollar was falling against the rupee, the importers had to hedge their payables, in order to avoid loss. The rupee started its upward march in June 2002, but in the forward market, dollar has still retained a premium, implying that the market expected the dollar to fall after 3-months or 6-months, depending on which forward rate is observed. Because of this, the importers kept on hedging their payables for a long time after the rise in rupee started. ... Just because the rupee is appreciating for now, it is dangerous to keep the entire position unhedged.