Indian exporters hold off USD sales eyeing better returns, hurting INR

  • Indian exporters are holding back on USD sales on hopes of a further slide in the INR, eyeing a windfall as the local currency plumbs record lows in 2022.
  • The INR breached the 83 per USD mark in a dramatic fashion on 19 Oct 22, once the Reserve Bank of India stopped protecting it at 82.40 levels. It hit a record low on 20 Oct 22 and is expected to decline further to about 84.50 by the end of 2022.
  • Brokerages and bankers alike said they are advising their exporter clients to either hedge less or not at all, as predicting INR’s eventual normal range has become difficult, while the only certainty was that it would decline.
  • “We are advising exporters to hedge only partially, about 15%-20% of their exposure,” down from anything between 40%-60% during normal times, a treasury sales executive at a large private bank said.
  • The INR’s woes are many – the U.S. Federal Reserve remaining on its aggressive rate hike path, widening current and trade account deficits domestically and foreign investors continuing to dump risk assets on fears of a global recession.
  • A weaker INR will help exporters as it increases their earnings. So with a steady fall seen ahead, they prefer to hold on to their USD for longer.
  • To protect the INR from sharp falls, the RBI has been intervening in both the spot and forward markets.
  • The buy/sell swaps in the forward market has led to a fall in forward premiums to their lowest in more than a decade, turning USD sales even more unattractive.
  • USD/INR 1-year forward implied yield currently stands at 2.45%, declining from 3.07% earlier Oct 22 and down sharply from 4.75% at the start of 2022. The declining premium has created a shortfall in USD supply, further hurting the local unit.
  • The INR has depreciated nearly 12% against the USD, almost in line with its Asian counterparts.

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