Session on USDINR Outlook and Hedge strategy for Imports, Exports and Loans on 11th Nov 2020Â
Questions asked during the webinarÂ
Q1). Regarding the ongoing US-China thing. China and India political issue and the US elections results that have come up. What is your view on INR CNY? If at all we have imports which are from China and we are using the Chinese CNY as the currency. What do you suggest? Is it good to continue using the CNY or convert those to the dollar for any opportunity which might be coming up?
 The question here is to ask that are you benefitting from the CNY filling on a fully hedged basis or not. Not on a view basis but when you are importing from China and if your billing is in CNY if on the same day you convert that into rupee as against if you have billed in dollar and you convert that into rupee on the same day. So on a fully hedged basis are you better off or not?
This has 2 parts- first, we are talking about the fully hedged basis. If in this case, you are getting a better rate in rupee terms by having a Chinese billing, then you continue. Otherwise, our suggestion is that you move to USD billing.
View wise, China is in a strong position. CNY is definitely in a strong position for 2 reasons. One is virus-related; China compared to other countries is performing better. That is one big advantage. Second and more importantly, Joe Biden’s presidency will be expectedly much softer on China. And the whole trade war-related risk. So it will continue to remain stronger compared to at least dollar, dollar to CNY, and CNY to INR. On the other hand, the rupee is range-bound or could end up depreciating a bit. That is the bias or depreciation is there for the dollar-rupee. So in all CNY to rupee will be costlier in the future unless you are getting the benefit on a fully hedged basis.
Q2. Can we also get the target rate being net importers?
Answer – Net importers, our suggestion would be if you want to manage on a net basis, then for the net amount which you have, you try to achieve 0% hedge cost. That is if you can save the forward premium on your net imports, you should be happy. Because it is very difficult to try to save too much the cost on the import side. Like if we look at the last 20 years of data of dollar rupee, or experience it is not easy. When we say it is not easy, that means it has risk. If we try to save, it backfires more often. So if you are a net importer, as long as you can save the forward premium, you should be happy. But also explore, segregating the imports and exports to some extent and manage separate rate. For some companies, it flies and for some, it doesn’t.
Q3. Any change in the CNY-INR import rates in the next 2 months? We have some imports to be done in the next 2 months for about 7 million CNY. Is this the right time to hedge CNY based on orders?
Answer – over a reasonably long period, we can look at the trends and say, INR could appreciate a bit more against the CNY. But in the very short term, it is too difficult to put on a view. The reason being, that the US election is still uncertain while the Biden presidency is almost sure, but there are court cases going to be at least till December. Also secondly, how the US will have its approach towards the corona virus vis-à -vis the other countries, all will determine the issue. So in the very short term CNY will rather appreciate significantly w.r.t dollar. It has reasonable levels of 6.62/6.63 level. So to that extent, it is stable. But rupee against dollar bias slightly towards (it is range-bound) 74/75 is possible. So in all, yes we agree that the risk of waiting is not as high, but given that further depreciation of rupee against dollar is possible in the next 2-3 months and CNY at least is going to be stable, it is a good level to hedge( not fully). Start with 30-40% hedging and then whenever there is a dip, if at all, because for some headlines, you keep increasing the hedge instead of hedging everything right away. Like if you get 670/680 kind of levels, then you should hedge a bit more. Start hedging right now, and slowly increase it. At least we don’t see too much of CNY appreciation w.r.t dollar bellow 6.6 significantly. So, in that sense you can wait out. But dollar rupee could go upto 74/75 possibly in the next 2 months, so whenever you get a reasonably good rate, keep increasing the hedge in lots. Â
Q4. Is a dollar-denominated loan at this juncture a good strategy?
Answer – Yes, that we believe is a good strategy in the current situation. And it is true for most of situations. Just that you have to select the appropriate hedge. This is one area which can significantly save cost as against rupee to rupee financing or any other structure. Two to three considerations, obviously one is that cost wise there is a chance of doing reasonably well by choosing the appropriate hedges. And second is the accounting that we have to keep in mind. Dollar hedges also needs to be considered. But in all, yes it is a good move. Also the recent fall in rates. Now the long term rates have gone up slightly, but the short term dollar rates are still low. So a short term bond could give you a good rate also. But long term, the rates have gone up slightly. But still, it is better.
 Q4. Do you suggest moving from a dollar-denominated loan to a rupee loan at this juncture?
Answer- No. we are not suggesting to move from a dollar-denominated loan to a rupee-denominated loan at this stage. Even with the dollar-denominated loan, hedge appropriately. That means keeping your exposures in mind. Do you have any natural hedges? Also keeping some kind of options in mind, at low-cost hedges and hedge appropriately. So that even if the rupee moves to 77/78, you remain protected or even if it is close to 80. Overall your INR will better with a dollar loan. One caveat here is that it all depends on the relative spread and when did you take this dollar-denominated loan. Is it a floating loan or a fixed-rate loan? If the rate of the dollar loan is very high, as a fixed rate you took. If it is a LIBOR link loan and if the spread on LIBOR is reasonable compared to rupee spreads, then it is better to hold on. But if the rates are very high, then you should always evaluate converting into a rupee. But as a general comment, it is not advisable to convert to a rupee loan.
Q5. What would be the EUR status going forward in the next 6 months?
Answer – EUR has definitely been extremely volatile. The initial market view, which we were also held, was that when EUR started falling below 1.17 that EUR will continue to fall because of the relative difference between Europe and the US in terms of coronavirus impact, which was keeping EUR high around August. Because Europe was fairly rid of the infection and the US had the infection still. But now that Europe is completely back in the second wave of infection. Also, that impact has been utilized. Also what is keeping EUR higher is the dollar weakness globally because of US election and because of the expectation that there will be a huge stimulus in the US, the economy will start picking up and general vaccine hopes, etc. All of them put together, risk appetite is there in the market and hence, the dollar is weak and EUR has been strong. We do expect EUR to come down to the 1.17-1.18 range. That’s the broad view.
Q6. Are there any currency swap that is possible In the current scenario?
Answer- Yes depends on your net worth. Certainly, you can swap your loans into USD or even EUR. But what is important is that you have to consider what natural hedges you have and what imports you had which can hedge your derived exposure. Because of a swapped exposure you cannot hedge and the monitory mechanism. These are the few things you need to set up before you enter into a swap. But for EUR it is a relatively better time compared to USDINR. At 75+ levels will be a good time for USDINR.
Q7. As net exporters do you still suggest dollar loans even though the 5-year forecast dollar might touch 90?
Answer- Depends on what loans you have. For 5 year forecast certainly, 5 year rupee will depreciate, though nor necessarily to 90, but an 82/80+ kind of level is a very reasonable expectation given the inflation differential and real effecting exchange rate equations. Now it depends on which loans you have weather it’s a short term loans roll over or ECB loan, the decision will depend on that. We would say that it is always better that you manage your loans separately and your exports separately. Because one is a very capital account kind of transaction and another is a current account kind of transaction. So in the loan your target should be to reduce the INR effective interest rate and on the export your idea should be to improve the budget rate. So continue the dollar loans but hedge that separately and manage export separately. Also, while you have a natural hedge concept, typical natural hedge concept fairly works in the short term loans because most of the times your accounting the exports are not really booked whereas your loans are for 5 years but they are booked. So to that extent there would be mismatches. So the correct way of managing a loan is to look at it in a separate framework and manage it with an IRR target or rather equivalent rupee cost funding kind of a target rather than managing it for exports. So they should be considered separately.
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