The rupee's near-continuous slide against the dollar - it has depreciated 3.3 per cent in this month alone - is sending importers scurrying to cover their overseas payment liabilities and hedge currency exchange risk. In fact, concerns that the rupee is unlikely to recover lost ground anytime soon is prompting traders to look at medium-term cover, rather than short-term options.
Citing traders, The Economic Times reported that companies are buying two-three month forwards contracts instead of fortnightly deals to help negotiate volatility. "Hedging interest has increased among importers, who now expect the rupee depreciation against the dollar to continue," Anindya Banerjee, currency analyst at Kotak Securities, told the daily.
The fact that forward premiums are going up - it has seen an uptick of 2-4 paise in the past couple of days in the one, two, and three-month maturities - is an early sign that demand for covers is rising. And it's likely to rise further if the rupee continues to depreciate.
The rupee opened at a fresh record low of 70.95 per dollar today, against the previous close of 70.74, and quickly proceeded to touch 71. The local currency has depreciated around 11 per cent this year so far and analysts expect it to hit the 72 level per dollar if the strong demand for the greenback persists coupled with soaring oil prices.
The latter is a double whammy because as the world's third largest oil importer, a fatter oil bill weakens India's fiscal condition. International crude oil benchmark Brent had gone up nearly 10 per cent in the past two weeks. Brent was trading at $77.71 in early Asian trade compared to yesterday's $77.65 a barrel.
"There is pressure on the rupee amid the general weakness in emerging market currencies," Bhaskar Panda, senior vice-president, treasury advisory group, HDFC Bank told the daily, recommending that overseas exposure "should be covered in such uncertain times". According to dealers, the demand for relatively longer-maturity currency forwards contracts can be seen in sectors such as petroleum, electronics, coal, agri-products and shipping logistics.
Although the rupee recovered some ground on suspected dollar sales by the RBI today, the apex bank is intervening only intermittently. So as things stand, the demand for forwards contract is only likely to grow in the near term.