Indian firms ramped up forex hedging in volatile election-results week

MUMBAI: The Indian rupee’s choppy trading last week in the wake of the national election results prompted importers and exporters to hedge a larger portion of their foreign exchange book in the forwards market, data showed.

Importers bought foreign exchange forward contracts worth $9 billion last week, a more than 70% jump from the same period a year before, data from clearing house CCIL shows.

Exporters hedged $6 billion, matching the year-on-year increase for importers.

The spurt in hedging activity came in a volatile week that started with the rupee rallying to 82.9475 per dollar on Monday after exit polls indicated a comfortable majority for Prime Minister Narendra Modi’s party and its allies.

But official results on Tuesday showed the ruling alliance party just about clung on to its majority, sending the rupee sliding to 83.53.

That range is roughly in line with the 83.00 to 83.50 range the rupee has held over the past two-and-a-half months and is a “well-expected” near-term one, an FX salesperson at a large private sector bank said.

“Two things were responsible for the pickup in hedging.

Indian rupee ends moderately higher

One was the perceived increase in the political risk premium and the other, which is more important, was the range that the rupee itself made,“ the salesperson said.

The rupee’s rally on Monday was an opportunity for importers and the decline after that for exporters, he said. The currency has been held in a narrow range, helped by the Reserve Bank of India’s regular intervention.

The central bank has repeatedly sold dollars near 83.50 to prevent it from breaching the all-time low of 83.5750, hit in April. On the flip side, the RBI is widely expected to use any major rallies in the rupee to build forex reserves.

“When you have a currency that has, for a long time, held established ranges, it makes sense for companies to take advantage of moves that are near the top or bottom of that,” said Kunal Kurani, associate vice president at Mecklai Financial.