I would be a rich man if I had a rupee for every time I have heard the phrase “Forex is not my business” from corporates with forex exposures.
Forex is your business
Please show this article to your boss, your CFO, your Chairman/ Managing Director, please show it to your Board. If you yourself are the CFO/ CMD/ or a member of the Board, please read this article twice over.
If your company exports or imports anything, then forex is your business. You could be exporting software, soya meal or pharmaceuticals. You could be importing coal, oilseeds, machines or chemicals. You could be importing rough diamonds and exporting polished diamonds, importing. In all cases, forex is your business.
Anything that impacts your business is your business
Unless you are cash rich and are a zero-debt company, you would be taking loans from banks. You are not a banker, but you are constantly on the lookout for ways to reduce your borrowing costs. Why? Infosys Ltd is into software exports. It is not in the education business. But, it conducts training for hundreds of technical graduates it hires every year, as a part of its normal activities. Why?
Godrej has entered the residential real estate business only recently. But, it has been providing accommodation to its employees at Vikhroli in Mumbai for a very long time. Why?
There are only a handful of power generation companies in India. But, many large manufacturers in India run captive power plants. Why?
More than 90 per cent of companies are not in the business of policing, but every company either employs security guards, or outsources the function to a security agency. Why?
The simple point is, any variable that impacts your business, that is critical to your business, is your business. You may not like it, you may feel it is an imposition on you, you may even want to outsource the function to an external service provider. But, ask Maruti. Security is very much a part of its business. Similarly, if exports or imports constitute more than 5-10 per cent of your business, forex is very much your business.
An exporter is ‘long dollars’; an importer is ‘short dollars’
I’ve said this before, but I’ll say it again. Your exposure is your position in the forex market. As an Exporter, you are to receive dollars in the future. You have taken a ‘long dollar’ position in the forex market by the virtue of the fact that you have exported. Similarly, as an Importer you have a liability to pay dollars in the future. So, you have a ‘short dollar’ position in the forex market.
Agreed, trying to make money from forex trading (repeat, from forex trading) is not what you should be doing. But, it is a fact that your exports and imports have saddled you with a forex position. You have no choice but to manage that position. Might as well do it well, no?
Even the RBI encourages corporates to manage their forex risk. G. Padmanabhan, Executive Director, Reserve Bank of India, has said in a speech “Managing currency risk in the new normal” on 28-July-12, that “The hedging activities of the corporates should be an integral part of their overall risk management policy and mechanism.”
Recognise. Commit. You will succeed.
Indians are acknowledged as good managers worldwide. Can they not succeed at forex hedging? Why then do so many companies report large forex losses? Saying “forex is not my business” is a defeatist attitude.
If you recognise that forex risk management is an essential part of your business and you commit yourself to it by sanctioning a hedge cost budget, you will be well on your way to hedging success.
Our experience tells us that there is scope to generate forex benefits – whether profits on exporters or savings for imports – to the tune of one per cent of the exposure. Try it. It’s worth it. You can do it.
(The author is Chief Currency Strategist at a kshitij.com. The views are personal. He can be reached at >vikram@kshitij.com .)