Indian importers and exporters left a bigger portion of their foreign currency exposures unhedged in 2023, relying on the Reserve Bank of India (RBI) holding the rupee in a narrow range.
Forward contracts purchased by importers to hedge future foreign currency payments dropped 14.5% on-year in 2023, while hedging by exporters declined 12.5%, according to Reuters’ calculations based on data from Clearing Corp of India.
Forward contracts are the most commonly used derivative instruments for hedging.
“For us, the drop (in forward hedging) has been bigger, more in the vicinity of 20% to 25%,” a senior FX salesperson at a private bank said.
“It’s hardly a surprise that companies, especially larger ones, see value in making less use of forwards in the current environment.”
A small part of the hedging via forwards has been replaced by options, said the salesperson, who declined to be named as their company policy does not allow media interactions. India’s total imports and exports between January and November 2023 declined 8% and 5%, respectively, from a year earlier. December data has not been released.
The RBI’s regular intervention in the spot and forward markets shrunk the intraday swings and overnight risks on the rupee last year, pushing volatility expectations to 15-year lows and making the rupee among the least volatile Asian currencies.
The currency moved in a narrow 3.5% band through the year, including in a mere 1% band in the December quarter.
India’s central bank has “actively managed the currency movement throughout the year”, Ashutosh Tikekar, head of global markets at BNP Paribas India, said.
“A stable FX environment and reduction in carry helped clients to under-hedge without worrying much about the profit and loss.”
On the outlook for 2024 hedges, Tikekar said India’s forex reserves pile provides “enough confidence to clients on RBI continuing with its (FX) policy in near future”.
Carry is the return on holding a higher-yielding currency vis-a-vis a lower-yielding currency.
In the wake of the U.S. interest rate hike cycle, the carry on the dollar/rupee pair dropped to a 15-year low in November.
Low carry deters exporters from hedging in the forward market. For importers, low carry is an incentive to hedge more, but not when the currency is very stable, bankers said.