Here’s what Indian importers are doing to hedge their positions as the rupee plummets
rupeeclosed a record-low of 70.74 to the US dollar on 30 August.
- While exporters rejoice, importers will find themselves shelling out more rupees for the same quantity of goods.
- Hence, in anticipation of the rupee’s continued weakness, importers are setting prices for two to three months through futures contracts instead of fortnightly deals.
While exporters and people who received remittances are no doubt, rejoicing, businesses that buy products from abroad to sell here find themselves worse off as a falling exchange rate only serves to increase their costs as it takes more rupees to buy an equivalent amount of dollars.
For example, the Indian government, which imports oil from abroad, is expected to see its crude oil bill increase by over $25 billion this year as a result of the rupee’s
How then, are importers securing their positions in order to minimise their losses? The answer is futures contracts.
In anticipation of the rupee’s continued weakness, importers are opting for two or three-month long futures contracts instead of biweekly contracts to minimise the amount they have to pay out. A
However, while it provides some form of insurance in the short-term, it is definitely a risk. If the rupee were to strengthen considerably in the course of the next month, perhaps by government intervention, then the companies would end up paying more than what the exchange rate dictates they should. So, in essence, it is a slight gamble.
In addition, if a lot of importers opt for these contracts, they have to a premium on them - which is called a forward premium. The bulk of companies that are opting for these contracts are from the shipping, coal, petroleum, electronics and machinery sectors.
Interestingly, there is a silver lining to the rupee’s freefall. It will help correct India’s $16.6 billion