HEDGE is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a FUTURE CONTRACT ( generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price at a specified time in the future).
Majority of the Indian companies have not hedged foreign currency, as per a study made by India Ratings and Research (Ind-Ra) through analysis of 100 foreign currency borrowers. These companies have kept their 64 per cent of foreign exchange amounting to Rs. 19.5 crores unhedged. The companies involving oil and gas, metal and mining, power and telecom sectors formed over 75% of this. The agency has also warned that even if the rupee is devalued by 10% the effect on these companies would be severe.
Of the 100 companies 29 companies come under the category of sub rated list, or not rated categories, which could be more vulnerable however, the remaining 71 companies have a hedge cover of around 38 per cent and could be cushioned keeping in view their financial strength and stability. In 2014, keeping in mind the damage that would be caused, due to not hedging their covers, RBI had in 2014 warned banks to provide sufficient provisions for their clients’ unhedged exposures. Though RBI had repeatedly advised for a cover, around 32 to 36 per cent of the total cover remained unhedged by companies.
IND-Ra further adds that sensitive sectors viz Oil and Gas, metal and mining, Airlines, Chemical and Fertilizer, paper and paper products have the most unhedged exposures, which in turn could lead to adverse rupee movement and ultimately resulting in decline in these sectors’ credit worthiness. As on Financial Year ending 2016, these sectors, together make around 63% or 13.5 lakh crore of gross unhedged exposures. Gems and Jewellery accounted for 1.2 lakh crore unhedged exposure.
However, sectors like Auto and Automomative suppliers and Cement Industry are likely to be benefitted since they have hedged around 70-100 of their exposures. Experts feel that relative stability of rupee might have contributed for the high unhedged exposures, since the rupee depreciation is to the tune of 10% since 2013.
Also experts feel that rupee would further depreciate by 10% and the London interbank offer rate might go up by 50 basis points which is 1.3 per cent at present.
There is also another opinion by currency dealers, that though the companies exposures are not hedged properly, there is an amount of truth in saying that a company which imports also makes exports, thereby the exposure is taken care partially since they net out their exposures, and also declare the same in their books. Thus, the cause for a concern is not that alarming.