Falling rupee spoils exporters’ dollar play

The falling rupee has now caught exporters on the wrong foot. Corporates, which took pre-shipment dollar loans a month ago and converted them into rupee funds, are now finding themselves in a fix. While they were delighted at having to pay lower interest rates on the dollar loans, they would now have to shell out more rupees to buy dollars at the time of repayment.

Sample this. An exporter took a three-month pre-shipment loan in dollar terms a month ago, when the rupee was trading at 39.50 levels. Now, the rupee has slipped to 41.50 levels, and almost touched 42 levels versus the greenback. This implies that when the exporter has to repay the loan, he will have to buy dollars at 41.5-42 levels against his borrowing rate of 39.50 levels.

A senior foreign exchange strategist with a multinational bank said, “To tide over such a crisis, most exporters are now choosing to either cut their positions by selling off their dollar-holdings as stop-loss triggers have been reached.” The other option considered, he said, is to roll over these dollar-denominated loans. However, considering the fact that access to foreign currency loans has become extremely difficult, especially after the subprime crisis, banks are not willing to roll over these loan contracts. Bankers see the rupee trading at 41.5-42 levels in the near- to medium-term, but are bullish over the long-term, given that the India story is still intact overseas.

Another treasury manager at a foreign bank pointed out that exporters, who took pre-shipment dollar credit from banks a few months ago and converted it into a post-shipment loan, would also be losing a lot, because they would have had no access to the forward route. Treasury managers say the three main factors contributing to a weaker rupee are: muted capital inflows, current account deterioration and sidelined exporters. The rupee has, in fact, slipped by over 4.5% since the end of April.

This has been largely on account of heavy dollar purchase by oil companies, given that crude oil prices have crossed the $126-mark per barrel. RBI, too, has abstained from intervening in the foreign exchange market ever since the rupee began to weaken versus the dollar. Tracking the weaker rupee, the premia payable on forward contracts, especially the near-term contracts, have risen sharply over the past few days. Treasury managers believe that premia on forward contracts would come down only when the US Federal Reserve takes a pause in its rate actions.