More than 70% of Indian IT Exports are to the United States and exports outside of United States as well are mostly priced in US Dollars (USD). So the movement of USD with respect to Indian Rupee (INR) is of paramount importance to the industry. The economic concept at play here is very simple, gains made by USD are better for us – we get to make more Rupees per Dollar of revenue. In other words, we favour INR to depreciate. This is directly opposite to what the Indian Government and other importers will desire – as for every dollar they import they have to pay more Rupee. Government is the largest importer especially of Oil which is mostly priced in Dollars.
Unlike the bigger players in the Industry, SME companies like Vishwak have little room to manoeuvre to get end customer prices (marked in USD) increased, most of the time our contract prices are negotiated a year in advance. We can improve productivity and reduce operational costs, but their impact is limited to few percentage points, nowhere near the 10% swing that has happened in the last one year in Dollar value. Till about few months we were worried due to the strengthening of Rupee, but in the last two quarters, the trend reversed. Today the Dollar hit a high note of Rs. 44.89, compared to Rs.40.63 exactly a year before – exactly a 10% swing the other way. One of the financial instruments available for exporters is the Forward contract (Hedging).
Forward Contract: It is a contract between the bank and its customers in which the exchange/conversion of currencies would take place at a future date at a rate of exchange agreed in advance under a contract. The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk.
RBI allows you to take these forward contracts for next 12 months (sliding window). Like many other SMEs at Vishwak we normally cover say 60-70% of our receivables for next 12 months. This has been helping us when the Dollar kept depreciating like it did for the first half of this year and whole of last year. But since the trend reversed in the last two quarters we have started losing nearly Rs.4 per dollar (10%) – of course, this risk was always there just like in any other financial instruments. Our Hedging taken last year (in July/August ’07 for July ’08 and so on) for this financial year (Apr ’08 to Mar ’09) has been at various levels around Rs.39 to Rs.41, but the current rate is Rs.44.89.
This made me interested to dig into this a little deeper, so I headed to RBI’s archive site and pulled out last 13 months data and plotted it on a chart in Excel (you can download the excel sheet I prepared from here). Below is the chart – you can see clearly the wild swings of Dollar.
I noticed the following few points of interest from the above chart:
- The dollar made a decline from Rs.41.24 to Rs.39.91 between 29/Aug/07 to 20/Sep/07. Nearly Rs.1.33 change.
- Continued to stay in the band of Rs.39 for next 7 months till 23/Apr/08
- The dollar made a rise from Rs.39.95 to Rs.42.56 between 23/Apr/08 to 26/May/08. Nearly Rs.2.61 change.
- The dollar made a rapid rise from Rs.42.82 to Rs.44.21 in just 15 days between 14/Aug/08 to 01/Sep/08. Nearly Rs.1.39 change.
- The dollar continues to rise with hitting a high note at Rs.44.89 today