InvestorQ : I learnt that the rupee fell last week because of pressure from importers and hedgers. Why is that important to the rupee value?
Mahil Khan made post

I learnt that the rupee fell last week because of pressure from importers and hedgers. Why is that important to the rupee value?

Answer
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Jignesh Gupta answered.
2 years ago


Why do people buy a forward cover? Let us say you are an importer then you will have a dollar payable after say 6 months. Obviously, no US Company will accept rupees because the rupee is now freely convertible and it is also not a hard currency. So, they will insist on dollars. That means the importer who has payable in dollars will want to ensure that the dollar does not appreciate as it will mean that he has to pay more rupees for each dollar. So importers will run to hedge their exposures and that leads to dollar demand and pushes up the value of the dollar.

In India the rupee forward market is quite large and deep. The rupee forward market is an Over the Counter (OTC) market as it does not trade on a regular exchange. Typically, importers, oil companies and foreign currency borrowers have an exposure in dollar terms and hence they need to hedge their exposures. However, since hedging takes away a large chunk of profits, most players prefer to keep some portion of their dollar exposures. When the INR becomes volatile, typically the corporates with exposure and the importers rush to their banks to hedge their dollar exposure using forwards. This puts pressure on the dollar demand and further weakens the INR vis-à-vis the USD.