Rupee’s bull run may end soon, say bankers & CFOs
The rupee may have some more steam left to strengthen, but should eventually settle down once the dollar starts strengthening on US tax reforms and the Federal Reserve adopting a softer stance on how quickly it would get rid of toxic assets in its bloated balance sheet.
The rupee has appreciated 5.5 per cent against the dollar in 2017 so far. Bankers and chief financial officers (CFOs) told Business Standard that the rupee movement was largely due to continuous, large foreign flows into local assets.
Arundhati Bhattacharya, State Bank of India (SBI) chairman, said, “We believe this trend will continue for two-three months though the volatility would be controlled by the Reserve Bank of India (RBI). However, beyond that period, we see the dollar strengthening and the rupee depreciating again.”
The appreciating rupee has become a challenge for companies that have exports or have foreign currency loans, which are unhedged.
“The monetary policy stance of the central bank is aiding the flow of debt funds, which could turn into a risk factor if the sentiment changes and global interest rates increase steadily. Corporates with forex exposures need to stay alert to developments which could cause change in the rupee trajectory,” said R Shankar Raman, director and CFO, Larsen & Toubro.
While it is bad times for exporters who have held on to their dollars, importers couldn’t be happier. Importers are driving up the forward rates to hedge their dollar exposure, and are hedging for a longer period against their usual practice of hedging every three months.
Importers who typically remain unhedged are also expected to join the bandwagon soon, say bankers. The reason is that the rupee has strengthened 5.5 per cent since January and they believe it would be beneficial to lock in at current rates.
“Even if they hedge for the sake of hedging, the importers will be in the money,” said Venkat Nageswar, deputy managing director for global markets at SBI.
This will eventually ensure that the rupee would hit a natural resistance even if the central bank stops intervening in the market. As a sign of importers hedging more, forward rates for a one-year dollar have gone up by 7-8 paise in the last two days.
Surely, the rupee movement has been a welcome breather for importers. India imports much more than it exports and therefore, the gain to the economy would be positive. But the rupee movement impact won’t be universal for all companies as the hedging and investment patterns differ from firm to firm.
“Indian companies which borrowed in hard currency but remain unhedged will heave a sigh of relief and they can possibly still cover their exposure,” Prabal Banerjee, group CFO, Bajaj Group, adding, for fully hedged borrowers, it doesn’t matter anyway.
Companies that have invested abroad in a weak rupee environment may have to take a small hit on their balance sheet.
It is also a good time for those borrowers who are in the market to pay their dollar loans and raise fresh rupee masala loans, said corporate treasurers. For example, Ajay Seth, CFO of Maruti Suzuki, said since the company is a net importer, the stronger rupee will have a positive impact on the company’s bottom line.
According to market estimates, roughly 50 per cent of the importers hedge their exposures as long-term trend suggested that rupee depreciates steadily. And a sharp movement, like that witnessed in mid-2013 following taper tantrum talks of the US Fed, could potentially ruin a company’s fortune had they been unhedged on their exposures. The rupee had hit its record low of 68.85 a dollar on August 28, 2013. According to SBI’s Nageswar, the key resistance for the rupee is at 63.90 a dollar, and if this level is breached, the rupee could hit 63.50, at which a floor can be established on huge importer demand. Technical charts though show that the rupee can strengthen as much as 62.20-30 levels, but that is unlikely to happen due to hedging related demand, he adds.
“These are extremely good level for importers to hedge. The dollar won’t remain weak for long and the rupee won’t be at these levels for more than a month or two,” said Nageswar. But what is leading to this strength in rupee? Corporate treasury heads and bankers say it is the perceived political stability in the country following election results in states, and the continued weakness of the dollar, due in some part to the US President Donald Trump openly calling for a weak dollar to protect American competitiveness. Meanwhile, the US Fed has not given a clear timeline on its balance sheet unwinding and, therefore, global money is flowing to emerging markets. India is one of the largest beneficiaries of this bonanza. So far in this calendar year, the country has received $14 billion portfolio flows, in both debt and equity and it is expected to continue for at least a month more. “The appreciation is not connected to fundamentals at all,” said Seshagiri Rao, joint managing director of JSW Steel and the CFO of JSW Group. The appreciation of the rupee is linked to foreign investment flows, he said, adding the rupee needs to correct to reflect the level of inflation prevailing in the economy; otherwise the export sector is going to get hurt.