The Indian rupee hit 80 to the dollar on Tuesday for the first time ever and currency experts predict currency hedging by domestic importers and borrowers of foreign currency loans is likely to put further pressure on the currency national.
In the first seven months of 2022, the Indian rupee depreciated by around 6%. The Reserve Bank of India (RBI) Financial Stability Report recently revealed that 44% of corporate external commercial borrowing (ECB) is unhedged against currency fluctuations.
The total amount of ECB outstanding is $1,79,994 million, while the unhedged portion is $79,125 million. A borrower and importer hedges currency risk by buying USD-INR futures on the market; and given possible Fed rate hikes in the US and also a growing current account deficit in India, the outlook for the Rupee looks very weak. This will force importers and borrowers to seek hedging cover, thereby increasing demand for the US dollar.
Indian Rupee Experts
Currency expert Abhijeet Awasthi said: “If importers and borrowers come to hedge, the Indian rupee will come under even more pressure.”
When the Indian Rupee appreciates, none of the companies hedge by claiming high premiums. In fact, this is the best time they should hedge, given the past pattern of the Rupee’s depreciation against the US Dollar.
The rupee has depreciated by 25% since December 2014.
“Most of these foreign currency loans would now be rolled over, while a few could be repaid. This has happened in the past and is expected to continue to happen in the future,” says Anil Kumar Bhansali- Finrex Treasury Advisors.
Sugandha Sachdeva, Vice President, Commodity and Currency Research, Religare Broking Ltd, says India’s external debt of around $267 billion, or nearly 40% of the total $621 billion, needs to be repaid to the during this exercise and that is certainly a source of concern. amid a bearish party witnessed by the Indian Rupee.
“The US dollar dominates foreign debt with a share of nearly 53%,” she says.
“In terms of external debt, the most important metric to look at is debt that matures in the short term or in a year. Reserves must be sufficient to account for the current account deficit and the maturity of the debt in the short term,” says Awasthi.
“External debt is not a cause for concern because working in any country requires taking out loans, especially when borrowing is cheaper than your local debt. We need to increase our exports relative to our imports to overcome the crisis we are currently facing,” suggests Anil Bhansali, Head of Treasury, Finrex Treasury Advisors.
“Even though the RBI has spent reserves to curb the sharp swings in the national currency, we still have a reasonably strong buffer of foreign exchange reserves to service our impending debt obligations for this financial year and our state of the external debt is not in danger”, says Sachdeva.
The current stock of foreign exchange reserves is $580 billion, although down from $640 billion in the middle of last year.
“It is quite possible that a window on the lines of the 2013 FCNR Swap will open and help the Indian rupee. The problem with such measures is that they must be designed in such a way as to actually succeed. much heavier depreciation. Unlike 2013 and the five fragile situations, the RBI understands that this time is a much broader global phenomenon and not specific to the Indian rupee. It could choose to delay the obligation of the Indian millennium, a kind of FCNR exchange solution”, adds Abhijeet Awasthi.
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