Key facts
- Indian importers are continuing to hedge against rupee depreciation by locking in future dollar purchase rates.
- The Reserve Bank of India's new measures have increased the cost of these forward contracts for banks.
- Importers now face charges of 11 to 14 paisa per month more for such trades.
- The rupee has strengthened to 94.72 per dollar from near 96.70 last week.
- Hedging activity is concentrated in shorter-term forward contracts of up to three months.
Indian importers are persisting with hedging strategies to secure future dollar purchase rates against potential rupee depreciation, despite increased costs imposed by banks. These higher charges stem from new requirements by the Reserve Bank of India (RBI), which mandates banks to hold cash equivalent to 20% of the notional value of forward dollar contracts sold. Banks are passing these compliance costs onto clients, resulting in an additional expense of 11 to 14 paisa per month for such trades.
Despite the added cost, forward dollar contracts remain appealing to importers. Bankers told Reuters that the rupee's recent recovery, supported by RBI's measures, has helped offset these charges. The currency strengthened to 94.72 rupees per dollar on Wednesday, a notable improvement from levels near 96.70 recorded last week.
This shift in hedging behavior has led to a concentration of activity in shorter-term forward contracts, typically up to three months. A treasury official at a private-sector lender noted that the cost of hedging varies with the length of the contract, making near-term options less expensive. Samir Lodha, managing director at QuantArt Market Solutions, advised importers to opt for short-term, low-cost hedging strategies, suggesting that option structures can mitigate some of the extra costs.