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Strengthening rupee to hurt unhedged firms

Unhedged exporters are in a spot, with the rupee strengthening from close to Rs 46 a few weeks back to above Rs 44 a couple of days back.

B.S. Srinivasalu Reddy | April 15, 2011 | Updated 09:00 IST

The foreign exchange market has been abuzz with strong expectations of the Indian rupee touching Rs 41 per US dollar ($) in a month or two, on the back of weakness in the dollar over the last few days.

With volatility expected to peak in the wake of global currency swings, experts are of the view that hedging has become a necessity. However, only a few exporters and importers are doing it professionally at present.

"Technical indicators are showing the rupee strengthening to Rs 41 per dollar in the short term (15 days to a month). With the rupee breaching our previous target of Rs 44.47 per dollar, we revised our downside target to Rs 41, with a reversal above Rs 46.07," said Jigar Pandit, currency analyst of Sharekhan.

Already unhedged exporters are in a spot, with the rupee strengthening from close to Rs 46 a few weeks back to above Rs 44 a couple of days back. On Wednesday, it had weakened by 12 paise to close at Rs 44.50/51 with many importers buying dollars to cut their costs. The domestic currency market remained closed on Thursday on account of Ambedkar Jayanthi.

Since March 2011, oil prices have been exerting pressure on the domestic currency. But good foreign direct investment (FDI) inflows and dollar taking a beating from major global currencies like the euro, British pound and Japanese yen also helped the rupee strengthen in the recent weeks.

Some banks are expecting the rupee to go as high as Rs 41/$ while others are pegging it at below Rs 46/$. Responding to a query, C. Chandrasekhar, senior vice-president, foreign exchange of Mecklai Financial and Commercial Services, said, "There are only a few companies that professionally hedge against currency uncertainties. Most of them have an ad hoc approach to currency management."

Ad hoc currency management does not take into account the required hedge. Instead they are prepared to suffer losses and pocket gains, if any.

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