Despite the exchange rate volatility since the beginning of this calendar year, few exporters are hedging their receivables.
The rupee has appreciated by about 10.4 per cent against the US dollar, since the beginning of this financial year and 3.4 per cent since January this year, on the back of strong capital flows. This month alone, FIIs have pumped in about $3.955 billion into equities and another $1.745 billion into debt, both Government securities and corporate debt.
Yet, despite the steep appreciation, there had been little Reserve Bank of India (RBI) intervention in the foreign exchange markets, traders said. This financial year, the RBI had intervened only for supporting foreign exchange demand from the oil companies. Interventions through purchase of the dollar were stopped in 2008 in the wake of the sub-prime crisis in the Western financial markets.
Primary concern
Top bank officials said the absence of RBI intervention to stem the appreciation was partly driven by inflation concerns. That inflation was the primary concern was revealed by the RBI Governor's statements explaining the monetary policy interventions on March 19.
At a press briefing in Bangalore on March 23, the RBI Governor, Dr D. Subbarao had said, “Anchoring inflation expectations and containing overall inflation have become imperative.” This implied that the RBI's inflation containment assumed precedence over exchange rate management.
With headline inflation nearing double digits, there were fears that intervention would result in money supply expansion, especially high-powered money. Broad money supply growth this year so far has been 16.4 per cent, within the RBI's target range. Expansion of reserve money through accretions to the foreign exchange reserves was a negative 2.5 per cent till March 26 this year. For the corresponding period last year, the growth was 3.3 per cent. For the financial year 2007-08, it was 44.3 per cent.
In addition, there were also fears that sterilisation of the consequent liquidity in the market would result in imposing a cost on the RBI, as it did till 2007, they added.
Importers hedging
However, despite the strong flows, bankers said there were few exporters interested in hedging their futures receivables. The Bank of Baroda Chief Economist, Dr Rupa Rege Nitsure, said, “With economic activity improving, non-oil imports will pick up in the coming weeks. This will exert downside risks on the exchange rate.”
Traders said that such a trend was already beginning to happen. Importers, especially oil companies and corporates with cross-border receivables, were resorting to long-dated forward cover up to 12 months. The overwhelming presence of importers in the foreign exchange markets have resulted in driving up forward premia. Six months forward premium firmed to 3.34 per cent on Wednesday as against the November average of 2.6 per cent.
If exporters had turned out in large numbers, forward premium would have softened.
Besides, traders said that the absence of exporters was partly driven by expectations of a correction, in view of an imminent exit from monetary expansion by the Federal Reserve Board of the U S. Since February, the Federal Reserve has gradually cut back some of the quantitative expansion steps.
Some of the Fed's collateralised liquidity support mechanisms are expected to end between the current month and June-end.
Source: thehindubusinessline.com