| MUMBAI, June 28
MUMBAI, June 28 As the Indian rupee tumbles to
record lows, Anil Jain, the chairman of a company which
dismantles old ships, is in a bind: like many of the country's
many small and medium-sized firms, his only way to hedge foreign
currency risk is hope.
His company, Atam Manohar Ship Breakers, bought a ship in
February for $6 million when the local currency was close to its
peak for the year at 49 to the dollar.
He now faces installment payments in July and August, with
the rupee recently hitting a record low of 57.32 to the
"Everybody is worried. The forward premiums are very high
given the rupee volatility. So we are waiting and watching to
see if the rupee recovers," said Jain, whose unlisted company
breaks down ships in the state of Gujarat on India's west coast
and sells them for scrap.
Jain expects to book a foreign exchange loss of 15 million
rupees in the April-June quarter, not good for a company with
turnover of only 1 billion rupees.
The rupee's tumble and the surge in volatility is
raising fears among policymakers and investors that smaller
Indian companies are not adequately hedged, especially those
with large overseas borrowings due for redemption in coming
Tight central bank regulations and deep-seated misgivings
over forex derivatives have made companies shy away from even
plain vanilla option contracts that treasurers say would provide
an effective tool to counter currency volatility.
About 60 percent of corporate India's non-trade related
exposure remains unhedged, while the proportion of uncovered
exposure for trade loans was at 40 percent as of the end of
March, the Indian Express newspaper recently reported, citing a
central bank report sent to the government.
That's a significant number in a country where companies
raised $30 billion via overseas borrowings in 2011, and where
the rupee has fallen nearly 15 percent from 2012 highs in early
February to become Asia's worst-performing currency.
"The hedging culture in India is still largely driven by
motive to make money out of the exchange rate rather than pure
business decisions to protect your core margins," said
Subramanian Sharma, director at Greenback Forex, who advises
small and medium companies on forex management.
"In short, it is the greed motive," he added.
Small companies are not the only ones facing losses: large
ones such as Cairn India, Tata Power,
Chennai Petroleum Corp, and Varun Shipping
each reported forex losses of over 1 billion rupees in the
quarter ended March.
'ONCE BITTEN, TWICE SHY'
The most immediate source of pressure is likely to come from
outflows to redeem overseas convertible bonds maturing this
fiscal year, which Edelweiss Securities estimates will total
The redemptions are due when the rupee is at record lows and
share prices are well below the conversion prices.
Edelweiss says most of this exposure is unhedged and expects
mark-to-market losses of 83.1 billion rupees ($1.45 billion) as
of the end of May could turn to actual losses.
Trade finance is another potential danger spot. Most Indian
importers borrow at lower interest rates from overseas. They pay
this back with a lag and are often unhedged.
Treasurers and forex advisors are advising companies to
hedge via simple options, but are finding a sceptical audience.
Indian companies, particularly smaller ones, have shied away
from using even basic hedging tools, scarred by their 2007-2008
experience when complex structured products, many of which were
tied to the Swiss franc, led to widespread losses.
That led to a spate of lawsuits by small companies against
banks that sold the complex structured products.
Having eschewed complex derivatives after being hurt a few
years ago, MindTree, a mid-sized technology company,
saw an FX loss of $830,000 in the January-March quarter,
"In our case, it is a little bit of a once bitten, twice
shy," said Chief Financial Officer Rostow Ravanan.
Ensuing lawsuits spurred the Reserve Bank of India to
tighten regulations, including banning popular option structures
requiring no up-front premium payment, which companies had used
to hedge their FX exposures.
The RBI's recent directive to ban exporters from cancelling
and rebooking forward contracts when they are in the red has
also dampened demand for derivatives, as it can saddle a company
with quarterly mark-to-market losses from FX exposure.
Though exporters benefit from a falling rupee, a sudden
rebound could threaten to spark losses.
"Due to the Reserve Bank's policy of not being allowed to
cancel and rebook forward contracts, corporates are far more
cautious while getting into forward contracts," said Rafeeque
Ahmed, president of the Federation of Indian Export
Cost also remains an issue. Many importers that have
remained unhedged now find the cost of buying dollars in the
forwards market too expensive.
Buying a one-year option now translates into an upfront
payment of around 1.25 rupees per dollar because of intense
market fluctuations, as indicated by volatility indexes.
($1 = 57.1700 Indian rupees)
(Editing by Rafael Nam & Kim Coghill)