Ticking forex time bomb? Most Indian firms are under-hedged

Most Indian companies with overseas debt have not hedged enough of their foreign currency risk, making them vulnerable to any sharp movements in the rupee, according to a study by credit ratings agency India Ratings.

The study of 100 companies holding Rs 19.5 trillion (USD 286.30 billion) of debt abroad as of March 2016, showed 54 of them, with 14.5 trillion exposure, were vulnerable given only 35 percent of their balance sheets were hedged, India Ratings, a unit of Fitch, said on Tuesday.

Of those 54 companies, 42 holding Rs 8.9 trillion in foreign currency debt could see their credit profiles “weaken substantially” should the rupee weaken by 10 percent, the rating agency said.

The high cost of hedging and the range-bound movement in the rupee over the last three years is deterring companies, said Rakesh Valecha, head of credit and market research at India Ratings.

“It is important that corporates don’t get complacent with rupee moving in a narrow band because if the rupee weakens sharply then corporates can see their margins hit, borrowing cost rise and even credit matrices moving down,” Valecha said in a briefing with reporters.

The rupee has been relatively range-bound since 2013, when it suffered its worst crisis in more than two decades, though it hit a record low of 68.865 to the dollar in November.

The relative stability of the rupee and cheaper overseas rates have led to more Indian companies raising debt abroad, increasing concerns over whether they are prepared to deal with a sudden plunge in the currency or falls in global markets.

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