It is coming....................

Last night U.S Fed hiked the discount rate for the first time since 2008. It is the rate charged to banks under the emergency window. The signal is clear all entities now have to align with money market rates and Uncle sam`s monetary is slowly going back to the barracks now that order is seemingly restored.

other Linkages .....................

1) There is a high possibility of hike in repo and reverse repo rate before next monetary policy meeting

2) The short-term deposit rates of Banks are expected to increase by 50 bps or so upto one year maturities.
    Which means lending rates may also go up !!-- The cost of short-term borrowing by corporates will get   increased by atleast 1 to 1.5 %


3) USD libor which is lower at present would start inching up over next 6m - thus pushing up interest costs for PCFC, suppliers credit,buyers credit frequently availed by exporters and importers

4) In India Higher food inflation is worrisome to add to it government borrowing for FY 10-11 is expected to be higher than that of 09-10.

5) There are strong talks of China revaluaing its yuan once again . The argument for revaluation is typically based on either curbing rising inflation or capital inflows. The two are legitimate reasons for concern.

Rupee Impact to be expected

Rupee can display very wild swings (a) towards appreciation if China does something suddenly or Indian inflation is not controlled despite rate hikes till mid of the year.   (b) towards depreciation  since Economic factors are poised for a reduction in corporate margins thus probably affecting stock markets and putting decent depreciation pressure in Rupee towards mid of the year   .

One needs to hedge the risks as the sequence of events cannot be timed precisely and it can impact your margins from timing difference even if you have a natural hedge within  a month or a quarter.

is this what you do ??

• Set no benchmarks for exposures

• Have a moving target for realisations (maximising) or cost (reduction) 

• Only see the hedged position and FORGET the unhedged exposure

• Clap when the market moves in favour of that only 10% hedge (what about unhedged?)

• Slap  when market moves against that only 50% hedge

• Trust bankers more than your in-house costing-marketing-finance specialists

• At end of the year decide nothing to do next year w.r.t forex exposures

The good news is that , its not all that bad considering that majority of us are either walking in the dark without even a small pocket torch to guard very next footsteps OR quite a few of us are using a high beam at night and feel they can see a planet far into the next galaxy before any other astronomer has seen. 

Foreign currency exposure management assumes importance in these volatile times and there has to be a scientific , objective and holistic approach to guard the bottomlines .