Indian exporters are holding back on dollar sales on hopes of a further slide in the rupee, eyeing a windfall as the local currency plumbs record lows this year.
The rupee breached the 83 per dollar mark in a dramatic fashion on Wednesday, once the Reserve Bank of India stopped protecting it at 82.40 levels.
It hit a record low the next day and is expected to decline further to about 84.50 by the end of this year.
Brokerages and bankers alike said they are advising their exporter clients to either hedge less or not at all, as predicting rupee’s eventual normal range has become difficult, while the only certainty was that it would decline.
“We are advising exporters to hedge only partially, about 15%-20% of their exposure,” down from anything between 40%-60% during normal times, a treasury sales executive at a large private bank said.
The rupee’s woes are many – the U.S. Federal Reserve remaining on its aggressive rate hike path, widening current and trade account deficits domestically and foreign investors continuing to dump risk assets on fears of a global recession.
A weaker rupee will help exporters as it increases their earnings. So with a steady fall seen ahead, they prefer to hold on to their dollars for longer.
RBI intervention roils
To protect the rupee from sharp falls, the RBI has been intervening in both the spot and forward markets.
The buy/sell swaps in the forward market has led to a fall in forward premiums to their lowest in more than a decade, turning dollar sales even more unattractive.
USD/INR 1-year forward implied yield currently stands at 2.45%, declining from 3.07% earlier this month and down sharply from 4.75% at the start of 2022.
The declining premium has created a shortfall in dollar supply, further hurting the local unit.
“After the rupee breached 80 per dollar, they (exporters) have reduced (the frequency of) coming to the market because premiums crashed. Unless we give them a yield of at least 3%-3.5%, nobody is interested in selling dollars,” said Abhishek Goenka, founder and CEO of forex advisory firm IFA Global.
While the demand for imported goods remains intact, exporters are unwilling to part with their dollars, leading to an artificial imbalance, he added. “That’s why the rupee is weakening.”
The rupee has depreciated nearly 12% against the dollar, almost in line with its Asian counterparts.
The currency strengthening by even 1 to 1.5 rupees would “change the game” and create a “fear of missing out”, prompting exporters to sell dollars, Mr. Goenka said.
Kunal Kurani, associate vice president at Mecklai Financial said the firm was encouraging its customers to keep their dollars parked in the Exchange Earners Foreign Currency (EEFC) account and convert only when the USD/INR rate moves up.
RBI allows exporters to keep their overseas earnings in an EEFC account for up to a month.
It has become difficult to time the level of rupee’s move, Mr. Kurani said.
“The call is to hedge above 83.50…but that’s being done on a conservative basis to protect the bottom line and margins of the client.”