After two years of calm, the rupee's sudden depreciation is beginning to strain Indian corporate earnings, prompting some companies to hedge their currency exposures.
InterGlobe Aviation Ltd., which operates India's largest airline, saw its foreign exchange losses triple to Rs 1,460 crore ($169 million) in the December quarter. Maruti Suzuki India Ltd., the country's largest automaker, also cited currency fluctuations as a drag on margins.
A few smaller companies have also reported currency losses, with more expected as the earnings season progresses.
The rupee has fallen 2.4% against the dollar in the last two months, the most in emerging Asia, fueling speculation that the Reserve Bank of India may have relaxed its tight control over the currency. While the central bank's approach over the last two years has reduced volatility, it may have caused companies to overlook foreign exchange risks.
With economic growth slowing and global volatility rising, businesses are under pressure to hedge their exposures at a time when rupee declines are expected to accelerate.
"There was some complacency that had set in because the rupee was so stable," said Neeraj Gambhir, Axis Bank Ltd.'s group executive for Treasury, Markets, and Wholesale Banking Products. He said that as currency volatility increased, so did the number of hedging inquiries.
Companies purchased $48 billion in forward cover in December, the highest level for 2024, according to data compiled by the Clearing Corp. of India. That increased hedging costs by more than a percentage point last month.
Smaller companies are also feeling the heat, with NIIT Learning Systems Ltd. reporting a forex loss of Rs 1.4 crore in the December quarter and Tanla Platforms Ltd. facing a currency impact of Rs 4.4 crore.
IndiGo's Chief Financial Officer Gaurav Negi said last week that the company will look into extending its hedging beyond the current 12 months. He stated that the company is insuring up to 70% of its exposure for a year.
India still has one of Asia's lowest foreign debt-to-GDP ratios, which serves as a buffer against rising volatility. It was $411.8 billion, or 11.1% of GDP, in the third quarter of 2024, according to Nomura Holdings Inc.
"While there may be some mark-to-market losses on unhedged exposure, and rolling over could be difficult if global financial conditions tighten, there do not appear to be any systemic risks," Nomura economists led by Sonal Varma wrote in a note.
Even so, rupee losses highlight former policymakers' warnings about the need to allow the currency to float more freely.
"If the RBI intervenes to stabilize the exchange rate against fundamentals, market participants will outsource their risk management to the central bank," said Duvvuri Subbarao, the central bank's governor during the global financial crisis, in an interview earlier this month.
