Falling rupee creates fresh losses on forex derivatives

India is staring at fresh losses on foreign exchange derivatives, thanks to the sudden, 7-per cent depreciation of the rupee in the quarter ended June 2008, with much of the fall coming in May.
After HCL Technologies announced last week that it will suffer forex losses of $65-75 million for the quarter ended June 30, 2008, the last two days saw three companies taking a hit on forex derivatives. Thursday Bangalore-based biotech company Biocon saw its net profits decline by 72 per cent for the quarter ended June 2008, thanks to a forex loss of Rs 6 crore and a mark-to-market provision of Rs 26 crore for its exposures to forex derivatives.
Wednesday, IT major Tata Consultancy Services (TCS) reported a forex loss of Rs 75.30 crore for the quarter ended June, which partly resulted in its net profits growing slower at 7 per cent year-on-year to Rs 1291 crore.
The sudden depreciation of the rupee resulted in a provision of $12 million (Rs 51.7 crore) on Mindtree's outstanding derivatives instruments,'' the company said in a statement. The losses are a result of the rupee bets going wrong. When the rupee was appreciating, many exporters rushed to cover and sold their dollar receivables forward. With the rupee depreciating 7 per cent, the exporters face losses on these contracts. "The losses are because of hedges taken earlier. An exporter may have sold his dollars at Rs 40, while the rupee is trading at Rs 43.07. IT companies have long-term contracts, and some have sold their receivables forward to prevent potential losses from an appreciating rupee.

So, exporters sold their receivables forward as they wanted to protect themselves. Exporters had suffered when the rupee appreciated 12 per cent from Rs 44 to Rs 39. When the rupee was appreciating, software companies hedged their receivables, though it varies widely across companies. "People wanted certainty, and have traded it off with future upside that they might have made from the depreciation of rupee,'' said the CFO of an IT firm. Analysts say typically, Infosys hedges three months of receivables, TCS has taken cover for $3-4 billion, amounting to 50-70 per cent of its sales and mid-size IT companies such as Mindtree have covered 50 per cent of their receivables.