Indian exporters are exploring alternative hedges to manage their foreign currency receivables as premiums on the Indian rupee hit decade-lows. Shrinking U.S.-India interest rate differentials have sent the rupee/dollar forward premiums falling. The 1-year forward premium dropped to 1.70% last week, not too far from the lowest level seen in more than a decade. What’s more, the premiums are expected to remain low, as the Reserve Bank of India is likely to remain on a prolonged pause, while the Federal Reserve plans to hike rates to tackle inflation. The drop in forward premiums means exporters receive a relatively unfavorable USD/INR rate when they hedge their dollar receivables, prompting many of them to seek innovative ways to augment carry.
According to Abhishek Goenka, CEO of IFA Global, a risk management firm that advises companies with a combined exposure of over $20bn, this unprecedented low-carry environment prevailing in USD/INR at this point has compelled people to look for innovative ways to augment carry. A TARF, or target accrual range forward, is an options structure that allows exporters to sell dollars at a far better than forward rate.
Jamal Mecklai, founder, and CEO of risk management firm Mecklai Financial, said: With forward premiums having come down substantially in the last year or so, option strategies appear to have come into their own for hedging exports. Meanwhile, Jayesh Mehta, managing director and India country treasurer at Bank of America, said large exporters can use options to hedge, but when premiums are too low, one might as well wait and sell on the day they have flows. The low premiums have also prompted some exporters to delay hedging in the forward market.
