C. Shivkumar

Bangalore, July 31 The rupee may have appreciated against the US dollar since July this year, but exporters are not taking forward cover, unlike in the past.

The rupee has appreciated by about 2 per cent from Rs 43.21 on July 4 to Rs 42.49. Yet bankers said that most exporters remained reluctant to hedge their inward remittances.

The reluctance to hedge was evident from the wide forward premia. Six month forward premium is currently at 6.10 per cent. During the corresponding period of last year, six month forward premium was 1.28 per cent, when exporters actually resorted to hedging their earnings.

The changed stance, bankers said, that stemmed from anticipation that exchange rates were likely to remain favourable to exporters. Part of the anticipation stemmed from the muted foreign institutional investor- driven inflows. During most of this year, FII flows remained negative. Since the beginning of this year till date, net FII led outflows amounted to about $3.65 billion.

Moreover, bankers said despite the Reserve Bank of India’s relaxation in the external commercial borrowings (ECB) guidelines on July 11, there was little interest in raising cross-border debt. The July 11 notification permitted foreign lenders, physical asset cover.

The aversion to cross-border resources presently was in view of the high spreads. Spreads over the London Inter-Bank offered rate are currently about 400 basis points, well over the RBI’s prescribed ceiling of 350 basis points. A year ago, top corporates were able to raise resources at spreads of a little over 100 basis points. Cross-border funding costs have increased considerably. Six month LIBOR is currently about 5.2 per cent. Inclusive of forward premium cross border debt costs are expected to be about 12 per cent.

There were also fears that the dollar interest rates were likely to harden after the Federal Open Market Committee meets next week. A hike in the Federal funds rate by even 25 basis points was expected to steeply increase the cost of cross-border resources, bankers said.

Moreover, corporates with external liabilities and importers were taking forward cover. Refineries, bankers said, were taking forward cover, taking advantage of the RBI’s June 3 guidelines. The guidelines permitted refineries to hedge their forward exposures. Refineries were also taking advantage of the softening global oil prices.

In addition, bankers said that several corporates that had raised resources through the Foreign Currency Convertible Bonds (FCCB) route were faced with redemption pressures. FCCB investors adversely impacted by the equity market meltdown were unwilling to exercise their conversion options and preferred redemption of the bonds.

Corporates, as a result, are likely to face bullet payment liabilities inclusive a redemption premium. This was because the FCCB’s were structured as deep discount bonds. Liabilities this financial year, if the redemption option is exercised, are likely to be about $250 million, unless there was turnaround in the equity markets, bankers said.

Larger corporates were, however drawing down on their domestic credit lines and hedging potential liabilities, anticipating redemptions. The hedging ensured that the forward premia remained firm at least, till the next few months, bankers added.

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