Synopsis”Companies with overseas borrowings are increasingly covering their positions as any sudden drop in the rupee’s value will raise their repayment liabilities amid uncertain time,” said Bhaskar Panda, executive vice president at HDFC Bank.
MUMBAI: Indian companies with US dollar borrowings are increasing their hedges as they foresee a currency depreciation due to flight of capital in the coming months both due to rising yields overseas as well as investors’ rising belief that Indian assets are overvalued that may lead to them booking profits.
The rising Covid crisis has cast a shadow on the earnings outlook as well.
“Companies with overseas borrowings are increasingly covering their positions as any sudden drop in the rupee’s value will raise their repayment liabilities amid uncertain time,” said Bhaskar Panda, executive vice president at HDFC Bank. Instead of long term hedges they are seen covering their positions with shorter duration contracts.”
“With developed economies gaining economic growth prospects, an expected fund outflows from emerging markets could weigh on the local exchange rate.”
Foreign portfolio investors (FPIs) net sold Rs 9,440 crore worth of local securities in April, the highest monthly outflow in the preceding 12 months, show data from National Securities Depository (NSDL).
US treasury benchmark yield trebled to 1.63 percent now since August last year.
In the past 17 years the rupee swang as much as 3.68 percent on an average every May against the dollar, shows an analysis of Kotak Securities. The average monthly volatility is the second highest only after September, pegged at 3.82 percent. Out of all years, only three times the rupee gained against the greenback.
This suggests, the local unit could well be heading for a roller coaster ride with a losing bias next month.
“Most companies have protections to limit the effect of currency fluctuations,” said Annalisa Di Chiara, a Moody’s Senior Vice President in a report.
Those include natural hedges, where companies generate revenue in US dollars or have contracts priced in US dollars, some US dollar revenue and financial hedges; or a combination of these factors to help limit the strain on cash flow and leverage, even under a more severe deprecation scenario.
“As a result, weaker credit metrics under a scenario in which the rupee depreciates a further 15% against the dollar can be accommodated within the companies’ current rating levels,” Moody’s Investors Services said.
The Rupee gained about 0.44 percent to close at 74.04 Thursday on global dollar weakness. It lost about 1.87 percent to the greenback in the past one month. The Federal Reserves kept fund rates unchanged Wednesday as it sought to see more evidence of a strengthening economic recovery.
“Dollar weakness added to the rupee’s gain Thursday,” said Anindya Banerjee, currency analyst at Kotak Securities. “The rupee would have gained higher had covid worries receded. An extending economic cost of localised lockdowns may prompt global investors to exit India pulling the rupee down before the local economy regains momentum.”
In the past two years, many Indian companies rushed to raise overseas money tapping record low US Treasury rates.
One-year onshore forward premium is yielding 5.03 percent versus 4.24 percent on April 9, a near term peak. Three-month onshore premium is at 4.82 percent versus 4.46 percent earlier. The one-month gauge is at 5.1 percent as against 4.1 percent. The increases in premium could be a combination of factors including RBI interventions, higher demand from companies and spread betters, dealers said.
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