Bangalore, April 22 Exporters have begun taking forward cover after almost six months, with the rupee expected to begin appreciating against the dollar.
Traders said that exporters’ hedging was mainly driven by large capital inflows this financial year, mostly portfolio equity flows from foreign institutional investors (FIIs).
Since April 1, net inflows from FIIs amounted to $896.3 million (about Rs 4,500 crore). Equity inflows alone amounted to $817.6 million (about Rs 4,080 crore). The rupee-dollar exchange rate is currently Rs 50.36.
But the inflows prompted exporters to hedge their receivables. As a result, forward premia dropped sharply. Six month forward premia is currently down to 2.69 per cent, from 4 per cent last month end.
Bankers said that among the exporters resorting to forward cover were commodity exporters and information technology corporates that have a large component of their revenues invoiced in US dollars. In addition, traders said refineries were not taking forward cover. Instead, refineries and corporates with cross border liabilities were leaving some of their positions open. This was because in the event of rupee appreciation, their effective debt service payments could shrink. But bankers, however, said that they were still cautioning their customers against leaving their positions open.
Spreads shrink
Banking sources said that the rupee could still appreciate in the near term, given the current level of buoyancy in the equity and debt markets. FIIs were also large buyers of domestic debt, mostly government debt papers, though some more risk savvy investors were also picking up triple “A” rated corporate papers. As a result, the spread between sovereign and PSU papers have shrunk to about 150 basis points. Three months ago, the spreads were over 300 basis points.
Bankers also said that the increased dollar liquidity was expected to trigger a spate of external commercial borrowings from corporates. Several corporates have already obtained approvals from the Reserve Bank of India for raising cross border debts.
However, till last month, few were able to raise the funds, even at spreads as high as 700 basis points over the London Interbank offered rate.
With six month LIBOR currently at 1.5 per cent, effective costs of cross border resources are likely to be about 8 per cent, inclusive of hedging costs. This was close to the domestic cost of credit for high rated borrowers. But bankers said that they were poised to reduce rates further, making credit cheaper in the coming weeks. This was particularly for project credit with promoters hamstrung by high interest costs.
Liquidity overhang
That domestic credit costs are likely to come down in the near future is evident from the high liquidity overhang in the domestic banking system and the recourse to the reverse repurchase window. Recourse to the reverse repurchase window at the first Liquidity Adjustment Facility Auction on Tuesday was Rs 61,510 crore.
High liquidity prompted the RBI to nudge for reducing credit costs with yesterday’s 25 basis point reduction in the reverse repo-repo rates.
Source : Business Lines