The appreciating rupee may reflect the strength of India's economy, but an unintended consequence is the complacency setting in among importers and borrowers. The level of unhedged foreign currency positions has risen substantially and poses a substantial risk if global conditions turn adverse.
With the local currency strengthening, Indian companies have stayed away from covering their foreign exchange liabilities because it would reduce their repayment costs.When the rupee appreciates against the dollar, fewer units of the local currency are needed to pay back each dollar.Unhedged or uncovered positions may have increased by as much as 60 per cent, according to industry estimates.
“With a rise in the rupee's value, many importers are now comfortable to keep their payables open,“ said Abhishek Goenka, founder of IFA Global, a Mumbai-based forex consulting firm. “The rupee's outlook has sig nificantly changed over the past six months as the local unit is now expected to rise against the dollar amid the country's economic optimism.“
Unhedged bets have increased at least by 50-60 per cent as import ers have drawn com fort from the ru pee's latest rally against the green back, Goenka said.
The rupee has gained more than 6 per cent this calendar year. About a year ago, the hedging ratio, which the Reserve Bank of India insists upon in a volatile currency market, was much better.Companies now pay about 4.3 per cent as hedging cost for a one-year maturity .
“With external borrowingsloans, im porters as well as companies that were worried over a falling rupee a year ago are now clearly in the driver's seat,“ said KN Dey, managing partner at United Financial Consultants, a Mumbai-based forex advisory firm.
Source: economictimes.indiatimes.com