Despite the worrying depreciation in the value of rupee,domestic firms with sizeable forex exposures continue to display an almost stubborn reluctance to hedge their foreign exchange risks.
One reason is that companies,especially mid-level private firms,do not want to lose out to competition in the future because their portfolios are aggressively hedged or miss out on the opportunity of locking in profits on their foreign exchange exposures,something that is particularly true of companies dealing with commodities and those in the IT/ITeS sectors. Apart from the fact that hedging requires expertise,it is also expensive and the advantage of the dollar loan is gone if companies cover their exposure to the greenback.
For state-owned firms,though,its a different dilemma altogether. Public sector companies,especially those in the petroleum sector that need to make purchases of oil in dollars and are therefore particularly vulnerable,have a large portion of foreign currency exposure unhedged. State-owned power and steel companies that have raised substantial amounts from the foreign markets in the form of ECBs too have enough unhedged forex exposures to give a private sector CFO sleepless nights. But for the finance head of a public sector firm,it goes beyond the predicament of deciding between how much to hedge and for what tenor. For most PSU finance chiefs,the bigger worry is not how to insulate the companys financials on account of unhedged forex exposure,but of a hedge potentially going wrong,which could invariably result in an audit crackdown by the CAG. For these finance professionals in state-owned firms,therefore,inaction on this count is a better bet than going in for a foreign exchange hedge that could turn counterproductive.
This is especially worrying at a time when there has been a sizeable rise in ECBs and rupee-denominated non-resident Indian deposits. Short-term debts,on residual maturity basis are estimated to have surged by about $25 billion in just 2012-13. Adding to the worries is that fact that the quantum of ECBs due for repayment this year is estimated at around $9 billion while companies would need to pay around $11 billion next year. Tall order,indeed.
Anil is a senior editor based in New Delhi.