Rupee slide: Paradip exporter vs Cuttack importer
The rupee depreciates from ₹82 per US dollar to ₹86 per dollar over three months. A seafood exporter in Paradip has just shipped 40 tonnes of frozen shrimp worth $2 million, payable in 90 days. Its costs are almost entirely in rupees: it has already paid ₹14.5 crore to fishermen and processors. An edible-oil importer in Cuttack has to pay $1.5 million for a palm oil shipment in 60 days. It sells cooking oil in a competitive retail market and has promised retailers a fixed rupee price for the next quarter. The exporter's banker offers a forward contract at ₹85.5; the importer's banker offers a forward at ₹86.5. The RBI has been selling dollars to slow the slide, and reserves have fallen by $8 billion in a month. Both firms ask whether the movement is good or bad for them and what they should do.
1. Compute the exporter's rupee receipts and gain or loss if unhedged versus the forward contract. Advise the exporter.
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Unhedged at the new spot rate: $2 million × ₹86 = ₹17.2 crore. Against costs of ₹14.5 crore, the margin is ₹2.7 crore. At the old rate of ₹82, receipts would have been ₹16.4 crore and margin ₹1.9 crore, so depreciation improves the exporter's margin by ₹0.8 crore. The forward contract at ₹85.5 gives $2 million × 85.5 = ₹17.1 crore, a margin of ₹2.6 crore. The forward sacrifices ₹0.1 crore compared with the current spot but removes the risk that the rupee appreciates before payment. Since the firm's costs are in rupees, a weaker rupee is beneficial, but the gain is a one-off currency effect, not a permanent improvement in productivity. Prudent advice is to hedge most of the receivable, especially if the firm has rupee loan repayments, and not to speculate on further depreciation.
2. Compute the importer's cost increase and margin squeeze. What pricing and hedging options does it have?
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At ₹82 per dollar, the $1.5 million payable costs ₹12.3 crore. At ₹86, it costs ₹12.9 crore, an increase of ₹60 lakh. Because the importer has promised retailers a fixed rupee price for the next quarter, this extra cost comes straight out of its margin. The forward at ₹86.5 would cost ₹12.975 crore, which is even higher than the current spot but locks in certainty. The importer could pass through part of the cost after the fixed-price quarter, but the competitive retail market makes full pass-through risky; demand may be elastic. It can buy forward cover, use a currency option that protects against further depreciation while preserving some benefit from appreciation, shorten price commitments, hold less inventory, or renegotiate with suppliers. A partial hedge plus a planned partial pass-through is usually more prudent than remaining fully unhedged.
3. Explain why the RBI's dollar sales may slow depreciation but not reverse it, and what the J-curve implies for the trade balance.
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By selling dollars, the RBI increases the supply of dollars and supports the rupee, but it cannot change the underlying demand and supply for foreign exchange indefinitely. Reserves are finite: a fall of $8 billion in a month signals that intervention is costly. If the RBI keeps selling dollars, it may slow the slide and calm expectations, but once reserves fall or the market expects further depreciation, the pressure can return. Depreciation makes exports cheaper and imports dearer, which should eventually improve the trade balance. The J-curve says the balance may worsen first: import contracts are fixed in the short run and import demand for oil is inelastic, so the rupee value of imports rises immediately, while export volumes respond only after capacity and contracts adjust. Intervention can smooth the path but cannot substitute for export competitiveness.