News »Browse Articles » Rupee hedges force Indian firms to post losses

Bangalore: Bad currency hedges have resulted in Indian companies losing a lot of money during the fiscal 2009. The losses have been reflected in the earnings reported by these companies for the fiscal. In some cases, the entire profit of the company has been exhausted because of this, reports FinanceAsia.

"It becomes important for the exporter to protect his margin at the time he recognizes his revenue or incurs expenses, and thus be insulated from currency movements," said Bhriguraj Singh, Head of Trade and Supply Chain for HSBC in India. The Indian rupee started 2007 at Rs. 44 to the dollar and steadily appreciated through the year to close at Rs. 39 to the dollar in December 2007. Most Indian exporters had not anticipated the rupee would strengthen by 11 percent through the year and their bottom lines were adversely affected.

Many banks thought that the rupee would strengthen further against the dollar, to levels around Rs. 36 to Rs. 37. Given prevailing sentiments Indian companies aggressively hedged their future dollar cash flows on the assumption that the rupee would stay stable or strengthen. By mid-2008 the rupee had fallen to Rs. 52 to the dollar, a drop of 40 percent. In May this year, India`s exports stood at around $11 billion, down 29 percent in dollar terms in the same month in 2008.

India`s goods and services exports resulted in total revenues of $155 billion during the fiscal 2008, which was an increase of 23 percent from the previous fiscal. Exports earn foreign currency while expenses are in rupees, so companies resort to foreign exchange hedging to reduce the effect of foreign exchange (FX) volatility.

The impact of currency hedges was felt in the Indian IT sector also. According to Singh, IT firms were driven by the margin protection, as more than 90 percent of their revenues are dollar-denominated. These companies were feeling vulnerable after the rupee appreciation they had witnessed in 2007 and, in response, aggressively hedged their future cash flows. "Many technology companies used to hedge more than what was necessary, for longer periods than required and further, used riskier forward contracts rather than conservative option contracts," said Ankur Rudra, Technology Sector Analyst at investment bank Noble Group.

Source:
http://www.siliconindia.com/shownews/Rupee_hedges_force_Indian_firms_to_post_los

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