Importers and overseas borrowers are rushing to cover their currency risk after the rupee fell to Rs 80 against the US dollar in both over-the-counter and derivatives markets on Thursday, leading to forward premium jumping 11-17 basis points across maturities on Friday.
One basis point is 0.01 percentage point.
With the rupee breaching the psychological Rs 80 versus the US dollar for the first time and the spot market USD-INR gauge heading towards that mark, companies that have significant overseas liabilities fear margin pressure will impact their nascent revival after the pandemic.
Oil companies and diamond merchants are among those rushing to hedge against likely further fall of the rupee.
“Importers are now hurrying up to cover their currency risk amid extending rupee’s losses,” said Bhaskar Panda, senior executive vice president at
Anindya Banerjee, currency analyst at Kotak Securities, said, “Importers are demonstrating a bit of panic in the past two days with the rupee hitting psychological lifetime low levels. Even the most aggressive risk taker is now inquiring about forward contracts as plunging rupee erodes their profit margins with rising input costs.”
He expects more clients to buy currency hedges “amid a fear factor”.
The rupee hit its latest lifetime low on the spot market on Friday at 79.96/$, and the Reserve Bank of India (RBI) prevented its further slide to 80 during the stipulated trading hours.
Analysts at Nomura have predicted that the Indian currency is likely to fall to 82 against the US dollar in the third quarter of this calendar year, citing the country’s record high trade deficit.
Despite the spike in forward premiums in the weekend, according to HDFC Bank’s Panda, their “existing levels are economically viable given the uncertain environment”. “Companies with significant overseas liabilities can still buy short-term hedges at attractive levels compared to long-term ones,” he said.
The 12-month forward premium yielded 11 basis points higher at 3.08% on Friday, show Bloomberg data compiled by ETIG.
The premium gauge is just doubled when it comes to, say, a two-year or three-year forward contract, dealers said.
Longer tenor forward contracts suit better for companies raising offshore money.
The one-month contract seems to be on high demand as importers primarily are looking for short-term cover. The matrix spiked 17 basis points to 3.16% on Friday.
“Of late, importers have showed concerns to cover their currency risk as the rupee hit 80,” said Abheek Goenka, CEO of foreign exchange advisory service provider IFA Global. “Break of the psychological 80 mark is certain to create panic among importers and those with unhedged dollar liabilities.”
Importers are using bespoke options (products) like ‘risk reversals’ and ‘seagulls’ to protect their risk, Goenka said.
Importers can consider hedging their exposures through long risk reversals, that is, buying a call and selling a put. This strategy is said to be still attractive as RBI intervention has contained rupee volatility.
About a month ago, the forward premiums dropped to decadal lows. A dedicated currency market intervention strategy by the central bank was primarily blamed for the same as it was seen intervening via two legs.
While select banks (on behalf of the RBI) were seen selling dollars on the spot, they are backing it up via buy-sell swaps. The move was aimed at protecting forex reserves, maintaining rupee liquidity in the system, and checking any abrupt fall.
However, RBI’s slew of measures to shore up forex reserves and cut any drastic drop in the rupee’s value against the greenback aided a correction more than a week ago, with the central bank signalling its intent of minimal future interventions in currency derivatives.