How can corporates use the ETCD platform to hedge their forex? Gaurang Somaiya explains

“We are expecting that this low volatility could still continue. So, there has been this tussle which has been going on between the bulls and the bears,” says Gaurang Somaiya, MOFSL.

First thing I want to ask about is the volatility in rupee which is at a multi-month low. Now, this is making Indian corporates a bit complacent in terms of the hedging in their currency. Is that what you are seeing? What is your understanding here?
Yes, we are seeing a bit of complacency coming in from these Indian corporates and as you correctly mentioned that yes, volatility has been at a multi-year low actually. We are expecting that this low volatility could still continue. So, there has been this tussle which has been going on between the bulls and the bears. We are seeing that the rupee is getting supported because of the FII flows but at the same time there has been active intervention going on by the RBI. So, this is again letting the rupee curb a bit of losses as well. We are seeing that the FX reserves are close to over $600 billion. So, all this is kind of keeping the rupee quite stable overall.

If I want to understand, what is your suggestion to corporates who are actually not participating or not hedging? What should they be doing and could you just highlight in terms of the importance of hedging and benefits that one could as a corporate have by hedging in the currency derivative market?
I think one should be actually looking to hedge their positions. See, what happens is that whenever you get a bit complacent in an environment wherein the volatility is very low, people kind of do not hedge their positions but we are still recommending that you should be going ahead and hedge your positions specifically for the importers because the premiums are also low which again is beneficial for these importers to hedge going ahead.

Obviously, for the exporters, it is not a very-very lucrative scenario because for importers if the premiums are low and payment will be beneficial, similar is going to be for the exporters wherein if premiums are low, they are not getting very good premiums.

So, we are suggesting for exporters they should be looking to hedge for short-term but for importers they could be looking at a medium-term perspective.

Just in terms of if we want to understand from a perspective of a small business or an individual that wants to use the currency derivative markets or to hedge their currency exchange risk, what is the possibility and what is the strategy one can use there if you could just help us on an individual perspective or a small business perspective?
In terms of the individual perspective, it is quite case-to-case. Some sectors might be preferable to go in for those short-term hedging. But for some businesses, they will obviously have to look at longer-term hedging. So, if I have to kind of give you an example, for an infra company, it will be better to hedge for a long term but for those textile manufacturers or for chemical businesses, they obviously will have to look at hedging in the short term because if they have to make their payments, they will not be able to take so much of risk because the margins are very-very low. Now, the month-on-month premium is close to 7 to 8 paise, for example. Now, for an exporter, it is not going to be very-very lucrative if they are booking their forwards at this point of time. But for importers, it will be a good thing because they are paying less premium for that thing and they will be able to make their payments at a very-very low cost.

If one wants to understand, how can a corporate actually use the ETCD platform to hedge their forex in terms of hedging and what are the requirements there? How can they use this?
So, obviously, the exchange traded derivatives have attracted a lot of interest in the last few years. But again, they have kind of been resilient. So, most of these bigger corporates have been a little resilient because you are not getting good volumes in the longer-term tenure.

In the short-term, obviously, you will be able to get those hedging, good volume, obviously, for hedging. But in the longer-term, you do not get so much of volume and which is why we are hesitating. But yes, we are seeing that the smaller corporates are coming in. They are using these exchange traded derivatives to hedge their currency risk.
And we, as a company, have been very, very actively advising a lot of corporates to hedge their currency risk even on the exchange as well as on the off-market thing.

I just want to understand currently, what is that contribution that could be coming in from these corporate hedgers in the ETCD market? What more can be actually done to get more of these corporates or enhance their participation in this market?
I think at this point of time, I probably might not be able to give you a number in terms of how much their participation is. But like I said, there is obviously a lot of things to be done in terms of the regulation side or probably more people need to get on the exchange traded derivatives to increase the volume as well as bring in that participation.

But on the regulation side, probably at this point of time, I might not be able to comment much on it.

I just want to understand in terms of, typically in the spot market, derivative markets, there is always a difference there. What is the potential that you actually see in terms of this ETCD market for India and other growth that we could see there?
I think in terms of the first spot and coming to the futures market, see, overall, the derivatives market has obviously been quite, quite big in the last few years. We have obviously seen a lot of participation, a lot of new entrants have come into this market. But in terms of the hedging, as I said, that still there is a bit of hiccup which is there in the market.

Spot market, obviously, it is much, much bigger as compared to what you see in case of the derivatives because most of the big corporates kind of hedge their risk, their currency risk on the spot or with the bank, which is why there has been a hesitation.

But as I said, there have been a lot of steps which are being taken by the government, by the RBI, to build up this market as well.

So I am sure going ahead in the near future, you will see this market also picking up specifically for the other major crosses because for the dollar-rupee pair, it is obviously a big market, but for the major other crosses, you will see a lot of participation also coming in.