MUMBAI: Importers and overseas currency borrowers are usually reluctant to hedge their US dollar exposure as they try to benefit from exchange rate movement to their advantage but with the US dollar strengthening and a collapse in the forward premium which makes hedging cheaper, there is a surge in covering USD positions.
The move reinforces the fact that rupee is likely to turn volatile, and some analysts see it reaching Rs 70-72 to the USD.
“Many importers are now rushing for currency hedges taking advantage of lower costs as they expect the rupee to turn volatile in future,“ said Keta Kurkute, VP, Mecklai Financial, a FX advisory firm. “The currency market has been lacklustre in the past 2-3 weeks but this has not made importers complacent with global and domestic events that will soon trigger ripples in the placid water.“
Hedging costs have come off across the board. Importers are mostly covering their positions in 1-3 month contracts, dealers said. In the past two months, the premium has fallen to 4.3% from 6.2% for one-year forward contracts. Even for 1-2 -month contracts, forward premia are trading in between 3.50% and 4.50% in the last three weeks, tempting importers to hedge dollar commitments.
The dollar-rupee 30-day contract was at 5.87% on December 21, and has now dropped to 4.61%, dealers said.
Donald Trump, the new US Republican president-elect will assume charge on January 20, a move, which is set to see some policy changes impacting outsourcing business.
Last week, shares of Indian information technology companies plunged after a bill backing key changes to the H-1B programme was reintroduced in the US Congress by two lawmakers who claim it will help crack down on abuse of the work visa.The visa allows skilled workers from countries including India to fill hi-tech jobs in the US.
“The rupee has been fairly overvalued, which only points to further erosion of the local unit's value to the dollar,“ said Anindya Banerjee, currency analyst, Kotak Securities. Securities.
“Importers are also wary of this and trying to cover their posi tions at a lower cost. Volatility is expected to rise ahead of US President Trump formally taking charge.“
Last October, the dollar-rupee volatility index hit a more than 8 and half-year low in October amid Reserve Bank of India's tight interventions to check the rupee's intraday day volatility.
The index dropped to as low as 3.50%, the lowest level since January 2008, according to the Bloomberg Implied Volatility Index. It now quotes 5.77% till press time increasing the chances intra-day sharp swings.