Unhedged importers at risk despite high forex reserves

The record Indian foreign exchange reserves doesn't automatically become an insurance against currency market volatility, as market positioning could whipsaw those unhedged importers which is estimated to have gone up by about $50 billion since the beginning of this year.

If the global currency markets turn volatile following a surprise from the Federal Reserve's quantitative easing's reversal, the rupee can not escape it even if there is an adequate cushion, said bankers. A rush to cover positions which are unhedged could trigger a slide in the rupee versus the US dollar.

This year, unhedged positions may have increased by roughly $50 billion, shows an internal estimate by Standard Chartered Bank. That is more than double of what it was two years ago."This can pose a risk of sudden fall in the rupee if the dollar reverses its current depreciation trend against other currencies," said MS Gopikrishnan, head of FXRC trading, South Asia at Standard Chartered Bank."Though there has been a large increase in trade deficit, the reserves level along with RBI forward book indicates continuing robust capital flow and remittances and heightened exporter hedging activity . But, for RBI's intervention rupee could have appreciated further," he said.

Those who have US dollar liability like importers who have to pay, or those who borrowed in greenback are supposed to be hedging their future payments against a possible slide in the value of the currency. The conservative central bank is unlikely to intervene to prevent currency movement when volatility sets in. If one factors in forward market purchases by RBI, it would add another $25 billion to reserves, dealers said.

Another disturbing sign has been India's rising current account deficit. Current account deficit has winded 2.4 per cent of the GDP in April-June, up from 0.1 per cent in the year-ago period. If the US administration delivers on its promised tax reform, it could spell trouble for emerging market currencies. "Importers are now feeling the same comfort the way exporters used to enjoy when the rupee was trading near all-time low," said Anindya Banerjee, currency analyst at Kotak Securities. "If US government lowers corporate tax rate suddenly, the safehaven rush will begin triggering panic in the emerging market currencies including ours." The flipside that provides comfort is the continued flow of foreign portfolio flow and that's leading to crowded trades.

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