The Indian Rupee hit 80 per dollar on Tuesday for the first time ever and currency experts predict, hedging of currency by the domestic importers and borrowers of foreign currency loans is likely to put further pressure on the domestic currency.
Over the first seven months of 2022, the Indian Rupee has depreciated by around 6 per cent. The Reserve Bank of India's (RBI) financial stability report has recently revealed that 44 per cent of the external commercial borrowings (ECBs) by corporates are unhedged from currency fluctuations.
The total amount of outstanding ECBs is $1,79,994 million, whereas the unhedged portion stands at $79,125 million. A borrower and importer hedges currency risk by buying USD-INR futures in the market; and given the possible hikes in the US fed rates and also a growing current account deficit in India, the Rupee's outlook looks very weak. This will force importers and borrowers to seek hedging cover, increasing demand for the US Dollar.
Experts on the Indian Rupee
Currency expert, Abhijeet Awasthi says, “If importers and borrowers come to hedge, the Indian Rupee will be under even more pressure.”
When the Indian Rupee appreciates, none of the corporates go for hedging citing high premiums. In fact, that is the best time when they should be hedging, given the past track of Rupee depreciation against the US Dollar.
The Rupee has depreciated by 25 per cent since December 2014.
"Most of these foreign currency loans would now get rolled over, while a few may be paid off. That is what has happened in the past and should keep happening 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, almost 40 per cent of the total $621 billion, is due for repayments within this fiscal year and that is certainly a cause of concern amid a declining spree witnessed in the Indian Rupee.
"The US Dollar dominates the external debt with a share of almost 53 per cent,” she says.
"In terms of external debt, the most important metric to look at is the debt which is maturing in the short term or one year. The reserves should be adequate to account for the current account deficit, and, short-term debt maturity,” says Awasthi .
"External debt is not a cause of worry because working in any country requires borrowings to be made, particularly when the borrowings are cheaper than your local debt. We need to increase our exports in comparison to our imports to tide over the crisis we are currently facing,” suggests Anil Bhansali, Head of Treasury, Finrex Treasury Advisors.
"Even as the RBI has been expending reserves to curb the sharp swings in the domestic currency, we still have a reasonably strong buffer of forex reserves to service our impending debt obligations for this fiscal and our state of external debt is not at risk," says Sachdeva.
The current stock of forex reserves is at $580 billion, though down from $640 billion during mid-last year.
“It is very much possible that a window on the lines of FCNR Swap of 2013 gets opened and helps the Indian Rupee. The problem with such measures is that they need to be designed so that they really succeed. A misfire can result in a much heavier round of depreciation. In contrast to 2013 and the fragile five situations, the RBI understands that this time it is a much broader global phenomenon at play and not specific to the Indian Rupee. It might choose to delay the India millennium bond, FCNR swap kind of solution,” adds Abhijeet Awasthi.
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