As rupee falls, companies' hedging concerns rise

Reserve Bank of India (RBI) needs to check the foreign flows that are encouraging the companies to leave unhedged exposures and strengthening the rupee.

US Federal Reserve left interest rates unchanged last week (September 20) but signaled it still expects one rate hike by the end of the year despite weak US inflation readings as the job market is turning around and the economic activity is improving.

Experts say that India needs to prepare both its markets and companies for this eventuality and for the end of the quantitative easing, which pushed cheap money into emerging markets.

US Fed also said that it is going to start unwinding the quantitative easing from October, reducing approximately $4.2 trillion in holdings of US treasury bonds and mortgage-backed securities by initially cutting up to $10 billion each month.

The central bank's intervention in the forex market is also bloating its forex kitty, which touched a record $402 billion in the week ended September 15, latest data released by RBI showed. September 22 , this excluded about $22 billion dollars that it holds in the forwards market. When these forward dollars mature, its kitty could swell further. But if foreign portfolio investors (FPI) withdraw, the reserves could start shrinking as RBI will have to release the ammunition to protect the rupee.

Jamal Mecklai, currency expert and CEO, Mecklai Financial, told DNA Money, "There is a risk of the flows reversing. Already the inflows into the equity markets have turned negative in the last two months. The forex kitty cannot have growth all the time. At some point, it needs to reverse. The forex reserves are going up also because companies are having unhedged forex exposures. RBI should take proactive steps to ask companies to hedge their exposures rather than run for cover later."

US treasury yields were also rising last week until sentiments got dented post North Korea's announcement of a possible hydrogen bomb test in the Pacific Ocean.

Venkat Nageswar, deputy managing director, global markets, State Bank of India, said, "The risk that we are seeing right now is FOMC statement regarding unwinding. This can cause disruption to most of the emerging market currencies. RBI intervention in the market is to ensure that there is not much of volatility and sharp appreciation of the rupee."

RBI is piling up dollars to support the rupee by buying dollars in the forward market as buying in the spot market will increase the rupee liquidity in the domestic markets. Treasury experts feel that the FOMC statement regarding unwinding can cause disruption to most of the emerging market currencies, including the forex kitty.

Ashutosh Khajuria, executive director Federal Bank, said, "The inflation in the US is also inching up towards their projected 2% and with the FOMC likely to raise interest rates, the US treasury rates are likely to go up from the existing 2.20%."

"The FPI debt limits are almost fully utilised. The foreign flows could face risks if the US Federal Reserve starts hiking rates," Mecklai added.

The FPI debt investments into India are also a part of the forex kitty. Most of the government limits in this category are utilised.

Investment in all government bonds by all kinds of FPIs is Rs 235,953 crore, which is 86.40% of the limit. The unutilised limit is only Rs 1,790 crore. FPI short-term investment limits into debt are almost fully utilised. Out of the Rs 187,700 crore limit, about 99.28% or Rs 184,567 crore is utilised. In longer term bonds, FPIs have utilised about 88.01% of the limits.

...& ANALYSIS

• US Federal Reserve left interest rates unchanged last week  
   
• If foreign investors withdraw, the Fx reserves could start shrinking
   
• RBI will have to release dollars to protect the rupee