Foreign Exchange Risk Management : How to Survive and Prosper in Difficult Times

The Surat Regional Office of the Synthetic & Rayon Textiles Export Promotion Council (SRTEPC) – in association with Vadilal Forex and Consultancy Service Ltd. – organized a Workshop on Foreign Exchange Risk management titled “How to survive and prosper in difficult times” in Surat on 3rd August 2013.

The objective of the Seminar was to familiarize member exporters in Surat region with the Foreign Exchange Market and identify hedging tools to manage forex fluctuations in recent times. In the current scenario of highly volatile foreign exchange transactions, such expertise in Forex Management should help exporters in reducing the risk in Foreign Exchange transactions efficiently. The Workshop was attended by about 30 representatives of member companies of SRTEPC.

The workshop on Foreign Exchange Risk Management in progress
The workshop on Foreign Exchange Risk Management in progress

Shri Sri Narain Aggarwal, Regional Chairman of SRTEPC introduced the expert Shri Hemendra Bhatia, DGM – M/s. Vadilal Forex and Consultancy Services Ltd to the audience.

Highlights Of Presentation :

Rupee Volatility & Depreciation :

Shri Bhatia explained that the widely perceived idea that Rupee has depreciated heavily since 2008 is actually a myth. He emphasized that the Nominal Rupee Depreciation is largely due to Inflation and lack of Real Appreciation. If one compares CPI – Urban Inflation of US and India e.g from June 2008 to June 2013, then there is no Real Appreciation or Depreciation. The Currency should be trading USD/[email protected] Changing the Base, the Basket of Countries, Currencies, Inflation Indices and methodology may
give differing results. However, the moot point he underscored was that Rupee has not Depreciated in Real Terms as heavily (nearly 50%) in Five Years, as it appear to most of us.
Inflationary Pressures :

Inflation after retreating from double digit is once again rising after crude prices topping $110 per barrel. Food prices are at an all time high with heavy speculative actions taking prices higher. Inflation erodes the value of rupee and hurts most to the weakest section of the society. It is politically unpopular and also raises governments borrowing cost. GoI’s Fiscal policies may be the reason for persisting inflation. Inflation makes Domestic Goods Costlier and Foreign Goods Cheaper (unless the Currency Depreciates) thus Encouraging Imports and Reducing Exports. It also encourages Gold Import as a Hedge against Inflation – one of the biggest Item on Import Bill in India. All these widen the Trade Deficit – which currently stood @ 191bn USD (10.7% of GDP) and for Q1 April – June 2013 @ around 50bn$ (11.21% of GDP) causing not only huge Current Account Deficit but severe Balance of Payment problems first time since 1991.

Sluggish Industrial Growth :

From expectations of double digit growth we are at decade low growth with industrial production on a constant decline and GoI lowering its own growth forecast to near 5% that also with doubts for 2013-2014.

Forex Risk & Hedging Strategies :

After outlining the problems faced by the Indian Rupee and the Economy, Shri Bhatia turned his attention to the tendency of the Trade to always Hedge the exports and leave imports and liabilities open – due to Dollar Trading at Premium to Rupee. He went on to explain that always selling USD is not the best thing as what you get is Interest rate differential (Premium) and what you risk is Inflation differential. If Interest rate differential remains lower than inflation differential for too long, it becomes huge risk. He also tried to dispel the popular myth that the premiums are the indicator of Future prices. Importers can guard against currency depreciation by using any of the following tools without locking forward rates :

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