The important features of exchange rate management for Indian companies are listed below:
1. Managing the exchange risk arising out of import/export transactions is possibly the most relevant for Indian Companies. There is a forward market in India where forward cover for normally upto 6 months can be obtained by the companies.
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While taking decisions in this regard, they have to consider the Exchange Control Regulations in India, currency price movements in the international markets and the trends in rupee exchange rates.
2. The simplest objective of an active exchange risk management system would be to obtain the most favourable exchange rate for all the foreign currency transactions of the company.
The really effective method of managing currency exposure is to budget for specific rate of exchange for the company’s import/export transactions and to strive to ensure that the actual import/ export transactions take place at such budgeted rates or better.
An active monitoring of the movements in spot and forward exchange rates is a crucial prerequisite for this. Decisions as to whether the transactions have to be covered in the forward market or to be left open would also depend on the views taken by the company regarding future movements in exchange rates.
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The extent to which the exposure is to be hedged would depend on whether the transactions in question relate to imports or exports; because of the secular depreciation in the value of the Indian Rupee, a larger portion of an import transaction may need to be hedged as compared to an export transaction.
3. As regards hedging the exposure arising out of foreign currency borrowings, Indian companies would have to rely on Roll-over forward contracts (RFC) since long term outright forward cover is not available in the Indian market.
4. Generally it is a prudent policy for corporations to try and see that their foreign currency borrowing portfolio consists of a balanced mix of currencies. Such a portfolio would normally ensure that losses on account of appreciation of one currency are to a large extent off-set by the depreciation in the value of some other currency.
5. Currency swaps can also be used t£> guard against the effects of adverse fluctuation in exchange rates.
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6. With a view to providing a measure of protection to borrowers of foreign currency loans against exchange risk, the all-India financial institutions, viz. IDBI, ICICI and IFCI evolved a scheme called the Exchange Risk Administration Scheme (ERAS).
In respect of all foreign currency loans covered under the scheme, the principal repayment obligation of the borrowers will be denominated in Rupees, at the rate(s) of exchange prevailing on the date(s) of disbursement(s). On such a rupee denominated loan liability, the borrower will pay, by way of servicing his loans, a “Composite Cost” every quarter.