Here’s what Indian importers are doing to hedge their positions as the rupee plummets

• The rupee closed a record-low of 70.74 to the US dollar on 30 August.
  
• While exporters rejoice, importers will find themselves shelling out more rupees for the same quantity of goods.
  
• Hence, in anticipation of the rupee’s continued weakness, importers are setting prices for two to three months through futures contracts instead of fortnightly deals.
  

If you’ve been reading the news, you’ll know that the rupee is on a free-fall. During trading hours today, the rupee even crossed the 71 mark after hitting a record-low of 70.74 at close on 30 August. This brings the rupee’s decline in the year so far to 10%, making it one of the worst-performing currencies in Asia.

While exporters and people who received remittances are no doubt, rejoicing, businesses that buy products from abroad to sell here find themselves worse off as a falling exchange rate only serves to increase their costs as it takes more rupees to buy an equivalent amount of dollars.

For example, the Indian government, which imports oil from abroad, is expected to see its crude oil bill increase by over $25 billion this year as a result of the rupee’s depreciation.

How then, are importers securing their positions in order to minimise their losses? The answer is futures contracts.

In anticipation of the rupee’s continued weakness, importers are opting for two or three-month long futures contracts instead of biweekly contracts to minimise the amount they have to pay out. A futures contract allows companies to settle on a price for a few months, thereby preventing short-term volatility. They can be customised to most products and commodities.

However, while it provides some form of insurance in the short-term, it is definitely a risk. If the rupee were to strengthen considerably in the course of the next month, perhaps by government intervention, then the companies would end up paying more than what the exchange rate dictates they should. So, in essence, it is a slight gamble.

In addition, if a lot of importers opt for these contracts, they have to a premium on them - which is called a forward premium. The bulk of companies that are opting for these contracts are from the shipping, coal, petroleum, electronics and machinery sectors.

Interestingly, there is a silver lining to the rupee’s freefall. It will help correct India’s $16.6 billion trade deficit, which is a result of imports exceeding exports. With the rupee declining, the cumulative value of exports in rupee terms will be significantly higher while imports will likely reduce in rupee terms as well as in volume as importers opt for smaller orders.