SME & Corporate Services
India is witnessing an unprecedented economic boom and is seeing increasing activity in the manufacturing as well as services sectors. Its export sector is thriving and various industry sectors such as IT, ITES, pharma, ship building, auto ancillary and textile produce goods for markets across the world. While the growth rate is showing a positive trend, export-oriented SMEs, MSMEs and corporates are also more exposed to Currency fluctuations – for many of them an unfamiliar territory.
Export comes with many associated risks relating to the realisation of payments and Currency exchange rates. Exporters are faced with a situation where costs are budgeted in Rupees and revenues are in foreign Currencies. It is very important to manage Forex fluctuations like any other business risks.
The Rupee appreciated to 39.4 per US Dollar in January 2008, compared to 44.00 a US Dollar in March 2007. After appreciating for almost 16 months, the Rupee then started depreciating and fell to an all time low of 51.2 a US Dollar in March 2009, due to Foreign Institutional Investors (FII) outflows. Today it is trading in the INR44–45/US Dollar range. This kind of volatility has exposed the SME, MSME, corporate and other export-oriented sectors to huge Currency risks which are eating up their profits. It has become imperative for these sectors to manage Currency exposures to mitigate risks.
However, there is not much awareness in this area and most exporters, out of ignorance, live with such risks. Given the cut-throat competition in the international markets, SMEs and other corporates need to operate at very low margins to retain market share or enter new markets. If profits are reduced by Forex losses, it is not a good thing for the businesses. Hedging in the Currency Futures market is an effective tool to mitigate risks. Currency Futures are Exchange Traded Derivatives which can benefit the small and medium exporters through hedging their Currency risk and minimising loss due to Currency volatility.
Exchange rate fluctuations impact different segments in various ways. When the domestic Currency appreciates, it is the importers who benefit from it and when the Indian Rupee depreciates, it is the exporters who benefits from it. However, the level of impact varies from sector to sector and the ability to withstand this impact is also different from sector to sector. For example, a company dealing in IT and IT-related services always has a higher margin than an individual dealing in the handicraft or textile sector. Hence, the IT company has greater capacity to withstand the impact of Rupee appreciation or depreciation.
We can classify this impact as follows:
- Impact on exporters : Strengthening of the Rupee is a nightmare for exporters, while the weakening of the Rupee boosts their profit margins.
- Impact on importers : Strengthening of the Rupee favourably affects an importer as their payments for goods go down when the Rupee appreciates.
- Impact on borrowers : In this global economy, Indian firms choose loans in foreign Currencies over Rupee loans because they are cheaper. However, when accepting a foreign Currency loan, there is a risk involved relating to exchange rate fluctuations.