NEW DELHI: The Reserve Bank ofIndia’s (RBI) central board is expected to discuss next week the elevated levels of unhedged foreign currency exposure at private and state-owned companies, which has made them increasingly vulnerable to the sharp depreciation of the rupee.
According to data submitted by the Reserve Bank of India (RBI) to the finance ministry, approximately 60% of companies’ non-trade related exposure is unhedged, while the proportion of uncovered exposure for trade loans is lower at 40%. This was the situation at the end of March and since then, the rupee has slipped by more than 11%.
On Thursday, the rupee closed at 54.47 to the dollar, a tad stronger than Wednesday’s close of 54.49, but not before dipping to a new low of 54.58 during the day. Corporates have been reluctant to protect themselves against currency fluctuations despite RBI attempts, sources said.
Finance ministry officials including chief economic adviser Kaushik Basu, financial services secretary DK Mittal and economic affairs secretary R Gopalan will attend the RBI central board meeting in Mussoorie on Thursday, where the large unhedged exposure will be discussed.
One reason companies have been postponing hedging their foreign currency exposures is the rise in forward premiums. From around 2% for a six-month forward cover in July last year, the premium jumped to around 7% last month. Since then, forward premiums have fallen somewhat to around 6-6.5%, thanks to RBI intervention.
The quantum of external commercial borrowings (ECB) due for repayment this year is around $9 billion. In addition, companies would need to pay around $11 billion next year. At its meeting, the RBI central board will also take stock of the country’s forex reserves and to what extent imports are covered. Over the past six months, the central bank has taken several measures to bolster the country’s foreign exchange reserves currently at around $293 billion.
Last December, it had freed interest rates on NRE deposits, which require depositors to take on the exchange rate risk. Interest rates on FCNR(B) deposits too have been raised. However, surprisingly, the government opened up borrowings through the ECB route for the aviation sector, with a cap of $one billion.
The central bank also eased guidelines for foreign currency convertible bonds (FCCBs). FCCBs worth approximately $2.5 billion are due for conversion between May and July out of the $6 billion due in 2012-13. Indian companies raised $35.96 billion through ECBs and FCCBs in 2011-12 compared with $25.77 billion in 2010-11 as per RBI data. “The trade-related exposure, which does not include exposure towards overseas loans, is not more than 50% of all foreign currency loans,” officials said.
Several state-owned companies, especially in the petroleum sector, have a large portion of foreign currency exposure unhedged. Oil companies such as IOC, HPCL and BPCL, which need to make purchases of oil in dollars, are therefore particularly vulnerable. Oil importers lose roughly Rs 8,000 crore a year, for every rupee of depreciation.