India's dollar inflow salvo sparks record $120bn in corporate hedging as exporters return

MUMBAI: Indian exporters sharply increased foreign exchange hedging in June after the central bank’s measures to attract dollar inflows tempered expectations of a sharp rupee depreciation, while importers also took advantage of a recovery in the currency.

Exporters booked a record $46.3 billion of hedges during the month, up 45% from a year earlier and 46% from May. Importers, meanwhile, bought protection worth nearly $74 billion, up 55% year-on-year and 5% from May.

Cumulative activity stood at $120 billion in June, a record tally, per clearing house data. The flows point to a market where exporters no longer expect the rupee to keep depreciating incessantly, while importers remain inclined to hedge on dollar-rupee dips amid uncertainty over oil prices and global risks.

“The outlook for the INR has shifted, with market expectations of significant depreciation receding. This change is reflected in client hedging patterns, with exporters, who had previously remained on the sidelines, increasing their hedging activity,” said Sameer Karyatt, managing director and head of trading at DBS Bank India.

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Last month, the Reserve Bank of India announced a raft of measures to bolster dollar inflows. Analysts expect the steps to attract $40 billion-$80 billion, with most of it likely to flow into the RBI’s reserves via a swap window, strengthening the central bank’s ability to support the rupee.

Rush for protection

Corporate FX hedging has been trending higher since the Middle East war began in late February. Between March and June, average monthly hedging stood at $102.4 billion, up from $74 billion in the same time frame last year.

“There has been a noticeable increase in hedging, especially on the importer side, in recent months. Corporates appear to be reassessing the volatility regime for the rupee, and that is leading to a more structural change in hedging behavior,” said Ishan Nijhawan - assistant vice president at Mecklai Financial.

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Indian rupee swings

The RBI’s measures helped arrest a months-long slide in the rupee, allowing it to recover from an all-time low of nearly 97 per dollar to around 94.

That recovery, however, has recently lost momentum, with recurring bouts of Middle East tensions reviving concerns over oil prices and pushing down the rupee to 95.50 per dollar.

The data shows that long-tenor dollar buying jumped sharply in June, suggesting some importers and borrowers with foreign currency liabilities took advantage of lower hedging costs to lock in longer-term protection.

Looking ahead, analysts say that expectations of a persistently weakening rupee may have eased, but the central bank’s buying of FX to shore up reserves could cap gains.

“While exporters may hedge opportunistically, importers are likely to be more aggressive and would look to hedge on any dips in USD/INR,” said Abhishek Goenka, chief executive at FX advisory firm IFA Global.