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M. Sitarama Murty

The feared, but inevitable, has happened. The rupee is now truly floating and sailing with the wind. The eternal optimists and the pundits who, not long ago, wished and expected to see the 50-mark, are faced with the grim reality of a strong rupee, nay, a weak dollar.

As the US economy is on a downward spiral - its woes compounded by financial disasters like the sub-prime lending - the Fed has only hastened the dollar slide. In an effort to support the staggering financial system, the Fed has softened the interest rate. In its march against the dollar, the rupee has chosen a natural course, maintaining its parity with other major currencies in a narrow band.

Recently voices have been raised both for and against the policies of the RBI and the Government. Now the process of reconciliation seems to have begun with the Commerce Minister’s statement that while the rupee strength is worrisome, export performance is on track. This is a clear signal to the exporters to stop vacillating and take urgent but permanent remedial measures. As the rupee has the last laugh, it is also an admission by the Government that, after all, it is the RBI which manages the show. In an integrated global market one has to respect the markets, which have only reiterated their faith in the Indian economy and the rupee. The FIIs are lapping up the investment opportunities in the vibrant Indian stock markets, even as the dollar has lost its sheen.

The rise of rupee, aided by the inflows, is like a tide which nobody can stop, at least for now. The foreign exchange earners, particularly exporters, including the IT and ITES sectors, are caught in a bind. They are genuinely a worried lot. For years they rode on the back of a rupee on its one way fall. Today, they find themselves literally at the cross roads, unable to decide on the route to take, to keep their noses above the water. The slowdown of the US economy is like a double whammy, even reducing the business opportunities and bringing down volumes. As the RBI and the Government look the other way, it is time the exporters put in place some mechanism to survive the exchange fluctuations.

In a recent interview, a CFO of a large software company made a revealing statement that his company was not thinking seriously of hedging its exposures.

There are three classes of finance managers. The first one takes a philosophical view and does not believe in ‘managing markets’, wasting his time. To decide ‘not to take a decision’ is also a decision, for this breed of managers. The second category believes in being extra cautious and meticulous, unwilling to lose sleep on tracking the markets. They would religiously hedge all the exposures and spend more time on balance sheet management. In a dynamic market these managers could miss out on opportunities to make more money and improve the bottomline.

The third are the ‘pragmatic’ types who take decisions on the basis of market developments. They might lose some sleep monitoring the markets. It is to their credit that they recognise that they are in the business of manufacturing or providing services, and not making money out of currency fluctuations. Instead of concentrating on playing with the exchange markets and rates, they hedge their receivables and payables selectively, with some expert advice. Many banks do provide free consultancy on currency movements and hedging techniques. As banks have a vested interest in marketing derivatives, their advice has to be tempered with one’s own judgment.

Despite the markets and the participants having matured, it is sad that many corporates have failed to take remedial action and lost heavily.

Operating in globally integrated markets, one can’t ignore the wide range of hedging instruments available, such as forwards, options and swaps. If the concept of insurance is understood, the cost of forex cover is akin to the insurance premium and a worthwhile expenditure for protecting earnings.

As a policy for better asset-liability management, exporters should consider adopting multi-currency budgeting, based on their business mix. The cash flows in various currencies have to be projected separately as apart of this exercise. An analysis of the data would make it that much easier to take decisions on hedging the inflows or outflows and on money transfers.

As a logical part of the risk management exercise, product pricing based on the projected cash flows and the exchange rate forecasts for the short term, say the next three to six months, has to be carried out. Forecasting is a difficult and hazardous exercise with no guarantee, but monitoring the market reports on an ongoing basis can minimise the risk.

One has to recognise the risks inherent in exchange rate fluctuations and load the anticipated changes into the pricing exercise. No doubt it is easier said than done in the highly competitive international trade. But it is certainly desirable to be aware of the perils and take conscious decisions rather than receiving shocks.

The choice of currency for invoicing is another important input and has to be made on the basis of exchange rate forecasts and the customers’ preferences.

A balance sheet is not a static document even in a single currency. If there are assets and liabilities in several currencies, it becomes a really dynamic statement of affairs. As a standard practice the items in other currencies are translated into rupee at the market rates periodically. The external auditors might be happy if this is done at quarterly intervals but it should be available to the finance manager online updated on a daily basis. It helps in fine-tuning the prices in negotiations and improves the bottomline.

(The author is a former managing director of State Bank of Mysore and can be accessed at : murthy@mandavilli.com)

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