As the rupee falls against the dollar, importers bet big on currency hedges

Companies with US dollar loans on their balance sheets, as well as importers, are scrambling to cover unhedged foreign currency exposures after the Federal Reserve's latest decision to curb inflation fueled fears of continued fund outflows from India, potentially hastening the rupee's further depreciation. With exporters also hoarding their earnings in anticipation of further weakness in the local currency, the odds of a surge in demand for currency hedging instruments are shrinking.

"Whenever there is pressure on the rupee, importers jump into the market," said Sushanta Kumar Mohanty, general manager - treasury at Bank of Baroda. "We could see some private players now rush in to buy currency hedges. With the rupee plunging to lifetime lows, it is high time they cover their currency risks to protect margins.”

Data from the Clearing Corporation of India up to June 20 showed that hedging activity is increasing, with importers/hedgers purchasing $1.6 billion in net forward contracts in a single day last week, up from $478 million at the start of the month.

Fed Chairman Jerome Powell told lawmakers late Wednesday that the US central bank was committed to lowering inflation in the world's largest economy, acknowledging the hardship that higher consumer prices were causing the average American. According to data from Bank of Baroda Economic Research, the top five sectors with the highest deficits, or the excess of imports over exports, are crude oil, industrial gas and fuels, trading, consumer durables, and telecommunications.