The Exporter Who Was Told the Rupee Never Appreciates
A Tiruppur garment exporter has a confirmed receivable of USD 2.4 million due in six months and an import payable of USD 900,000 due in three months. His bank quotes spot USD/INR 84.10/84.12, a six-month forward at 85.55/85.60 and a three-month forward at 84.70/84.75. A six-month USD put at a strike of 84.00 costs a premium of 2.4% of notional. His operating margin is 7% and his budget rate for the year is ₹83.50. The rupee has depreciated 2.8% in six months; RBI reserves are around USD 645 billion; CPI inflation is 5.9% against a 4% target; and the US Fed has begun cutting rates while the MPC holds. His relationship manager advises leaving the exposure open because "the rupee has never appreciated for long".
1. Compare the forward, the option and the open position for the USD 2.4 million receivable, and decide what the exporter should do.
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Forward. Sell USD 2.4 million six months forward at the bank's bid of 85.55: 2.4 × 85.55 = ₹20.53 crore, certain.
Option. Premium = 2.4% of USD 2.4 million = USD 57,600 ≈ ₹48.4 lakh at spot. Protected minimum receipt = 2.4 × 84.00 = ₹20.16 crore − ₹0.484 crore = ₹19.68 crore. Break-even against the forward: (20.53 + 0.484) / 2.4 = ₹87.57. The option beats the forward only if spot is above ₹87.57 in six months - a 4.1% depreciation from 84.10. That is a directional bet, not a hedge.
Open position. At today's spot the receivable is worth ₹20.18 crore. A 3% rupee appreciation takes it to about ₹19.58 crore - a loss of ₹0.60 crore against an operating margin of roughly 7% on ₹20 crore, i.e. about ₹1.4 crore. A 3% currency move destroys 43% of the year's margin.
Decision. Hedge the receivable with the six-month forward. The forward is 1.72% better than spot for six months, an annualised premium of about 3.4%, which is roughly the interest differential - the bank is not charging for the view. The option premium of 2.4% for six months (about 4.8% annualised) is far too expensive for a 7%-margin business, and only pays if the rupee weakens beyond 87.57.
Caveat. Do not treat the forward as free: it removes the upside as well as the downside, and it creates a delivery obligation. Book it against the confirmed export order, which satisfies FEMA's exposure requirement.
2. How should the importer payable change the analysis, and what is the net hedging position?
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Natural hedge first. The USD 900,000 payable due in three months offsets part of the receivable. But the timing differs - the payable falls due in three months and the receivable in six - so the offset is imperfect; the three-month gap can be bridged by a short-dated forward or by swapping the three-month purchase for a six-month one.
Net exposure. USD 2.4 million − USD 0.9 million = USD 1.5 million of net dollar inflow over six months.
Locking the payable. Buy USD 900,000 three months forward at the bank's offer of 84.75: 0.9 × 84.75 = ₹7.62 crore, fixing the import cost today and removing the risk that a rupee slide raises input costs.
Locking the residual. Sell USD 1.5 million six months forward at 85.55 = ₹12.83 crore. Net outcome in six months: 12.83 − 7.62 = ₹5.21 crore, plus the three-month timing difference.
Why still hedge the net and not the gross. Hedging the gross receivable and the gross payable separately is economically similar but doubles transaction costs and creates two delivery obligations. Netting is cleaner and matches FEMA's principle that forward contracts should reflect genuine exposure.
Judgement point. A common error is to hedge only the receivable and leave the payable open as a "natural hedge". That is wrong when the timings differ and when the payable is in the same currency: both legs should be crystallised, because the exporter's margin is exposed to the rupee, not to the direction of his own optimism.
3. Evaluate the relationship manager's advice in the light of the macro backdrop.
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The advice is a non-argument. "The rupee has never appreciated for long" is neither testable by the exporter nor relevant to a single six-month exposure. History does not pay for this consignment. Three specific errors:
- It confuses direction with risk. The exporter is not paid to take currency risk; his comparative advantage is garment manufacturing. A 3% adverse move costs 43% of the year's margin - a single unhedged receivable can wipe out the profit on several shipments.
- It ignores the budget rate. At 83.50, the budget is already below spot; a spot of 83.50 or below on the receivable takes the transaction to or through break-even. The forward at 85.55 comfortably beats the budget rate and locks a gain.
- It misreads the macro. The rupee has depreciated 2.8% on a wide interest differential and RBI reserve accumulation. But the Fed has begun cutting while the MPC holds, so the differential is narrowing - which compresses the forward premium and, all else equal, reduces the structural depreciation pressure. Reserves near USD 645 billion give RBI the capacity to smooth, but not to reverse, a shift in the differential. The exporter should not be positioning for the RBI to defend a particular level.
What the banker should have said. The forward premium of about 3.4% annualised is essentially the market's unbiased estimate of the interest differential, not a gift. Hedge the confirmed exposure, use the natural offset on the payable, and if the exporter has a genuine view on rupee weakness, express it with a small option position sized to a cost he can afford - not by leaving ₹20 crore of receivable naked.
Regulatory note. Forward contracts must be booked against a declared exposure under FEMA; speculation is not permitted, which is another reason the "leave it open" advice is inappropriate to give to an exporter.