By Nimesh Vora
MUMBAI (Reuters) – Indian exporters may need to adjust their strategy to manage foreign exchange risks, considering rupee forward premiums are likely to remain low relative to historical standards, some analysts said.
The dollar/rupee forward premiums – which reflect the U.S. and Indian interest rate differential – have plunged from around 4.6% at the start of 2022 to about 2.1% currently.
This means Indian exporters will receive a lower rate when they hedge their future forward dollar receipts for the same level of spot.
The U.S. Federal Reserve has had to adopt a more aggressive interest rate-hike cycle relative to the Reserve Bank of India, pushing premiums in December last year to near their lowest in more than a decade.
Premiums are not expected to move back to the 4%-5% level given the inflation outlook and the likelihood that the Fed will keep rates higher for longer.
“With premiums low and the likelihood that they will remain low, Indian exporters will have to adapt,” said Jamal Mecklai, founder and chief executive of risk management firm Mecklai Financial.
“Historically, a premium of 4%-5% provided a bit comfort to companies that wanted to hedge some part (or all) of their exposures, despite expectations that the rupee will depreciate.”
Now with premiums at 2.1%, it is not advisable to hedge for longer maturities like 12 months, he said.
Given that a full hedge is unattractive on account of premium levels and having a large unhedged exposure is inadvisable, Mecklai recommends a momentum-based toggle where exporters can switch between two hedging strategies considering the USD-INR momentum at the start of the period.
Samir Lodha, managing director at Mumbai-based FX advisory firm QuantArt Market Solutions, said exporters’ overall hedging has “definitely” fallen due to lower premiums and the rupee’s outlook.
“Taking long-term hedges right now makes limited economic sense and we are seeing this even among the hard-core export hedgers,” Lodha said.
They are more willing to look at option structures like range forwards for hedging between 3-12 months, Lodha added.
There is a change in how companies are choosing to manage their dollar receivables due to the low opportunity cost, measured in terms of the carry they will not receive if the exposure is left open, said a forex sales official at a private sector bank. He advises medium- and small-sized clients.
“With premiums less attractive, there will be clients who will prefer to hedge near to the actual flow date and, maybe, even on a cash basis,” they said.
“Obviously how spot behaves plays a big role.”
(Reporting by Nimesh Vora; Editing by Savio D’Souza)
