4) The large cap companies in India are tied over exchange rate volatility despite FCCB borrowing because they are deep pocket companies.
8.0 EXHIBITS Exhibit 1: Number of contracts in Derivative Market
5) The problem is faced by mid-cap companies majorly like Sesa Goa & Suzlon Energy.
6) The small & mid-cap companies have not been able to benefit and have high un-hedged exposure.
800,000,000 700,000,000 600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000
0
Currency Futures Currency Options
7) For large cap companies, the concern is higher for the Revenue Account than the Capital Account. |
2012-2013 |
2011-2012 |
2010-2011 |
2009-2010 |
2008-2009 |
7.0 RECOMMENDATIONS
! Small and Mid-Cap companies should adopt derivative instruments to hedge their foreign currency risks as they increase the reach of the scope of their operations.
! RBI is pondering over Full Capital Account Convertibility. It says,“ It is not an event, but a process”, it shall take its due course depending on the development of financial markets. So the corporate firms should watch out for the same.
! Indian software companies which are hugely dependent on foreign income for their revenues should enter into forward contracts.
! Capital intensive companies like those in the petroleum and mining sectors that are hugely dependent upon import of raw materials should raise external debt through FCCBs from the countries in which they source their goods.
! Interest rate and currency rate swaps should be used by export oriented companies since it is the most costeffective instrument for hedging foreign debt risk. Similar to the Greenwich Framework for a sustainable forex management policy, we would like to suggest a framework which will help in appropriate risk hedging.
! Documentation of forex policy- The forex policy should be documented so as to guide and keep the managers aware of their objective at all times.
! Forecast forex exposure- Forex exposures should be forecasted for every term and the actual exposure found should then be compared. The disturbance term should be thoroughly analysed to identify a pattern if any, which shall help in understanding the market behaviour.
Exhibit 2: Systemic Risks perceived by Market Participants:( Source: CMIE Prowess)
Risk from infrastructure sector Regulatory risk Corporate risk
Capital flow Interest rate risk
Perceived slowdown in policy reforms Domestic slowdown
Funding risk High current A / c deficit
High inflation Fiscal risk Global risk
Asset quality Market volatility
Others
Exhibit 3: Break-up of Foreign Exchange Reserves: A sign of market volatility
350000 300000 250000 200000
Apr / 11 Jun / 11
Aug / 11 Oct / 11
Dec / 11 Feb / 12
Apr / 12 Jun / 12
Aug / 12
Oct / 12
150000 100000 50000
0
290000
280000
270000
260000
250000
240000
230000
SDR’ s Gold Foreign Current Asset
! Competitive trading of derivatives and use of automated systems to understand derivatives.
! Prudential accounting for counter-party risk should be done.
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