RETAIL RESEARCH 19 Jan 2017

Indian Currency Market A Technical Perspective for Traders and Hedgers

Prev. Immediate
Immediate Supports Next Supports Next Resistances
Currency Pair CMP Close Resistances

68.21 68.25 67.94-67.84 68.27-68.34 67.58-67.31 68.59-68.70

USD/INR

72.51 72.68 72.13-72.04 72.86-73.20 70.27-70.12 73.43-73.61

EUR/INR

The USDINR pair slide lower in the initial part of the week,
with the upper band of the 21-day Bollinger Band acting
as a resistance. The week ended with the USDINR pair
bouncing back sharply from a low of 67.84.

Technical indicators are now giving positive signals. While

the pair trades above the 13-day SMA, momentum
readings like the 14-day RSI are rising, which is a healthy
signal.

Further upsides are likely once the immediate resistances

of 68.27 are taken out. Weakness could emerge if the
supports of 67.94 are broken.

Carrying on from the previous week, the EURINR pair

continued to move higher before reacting from a high of
72.86. The upper band of the 21-day Bollinger Band acted
as a resistance.

Technical indicators are nevertheless giving positive

signals. While the pair trades above the 13-day SMA,
momentum readings like the 14-day RSI are in rising
mode.

The pair would need to cross the immediate resistances of

72.86 for further upsides. Crucial supports are at 72.13-
72.04.

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Indian Rupee Currency market moves against major world currencies

JPY/INR JPY/INR has bounced back from supports. GBP/INR GBP/INR has reacted from resistances.
Further upsides are likely. Further downsides are likely.

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Strategy for Currency Hedgers

With the USDINR remaining in a short term uptrend, exporters can choose to go light on hedging their receipts if they
are willing to take the risk. This is because the weakening of the Rupee favorably affects an exporter as their receipts for
exported goods go up when the Rupee depreciates.

It is more important for importers to hedge their payments for the next 1-2 weeks as the USDINR pair could head higher
in the short term. This is because the weakening of the Rupee negatively affects an importer as their payments for
imported goods go up when the Rupee depreciates.

A primer on Currency Hedging

Hedging in the Currency Futures market is an effective tool to mitigate currency volatility risks. Currency Futures are
Exchange Traded Derivatives which can benefit the exporters and importers through hedging their Currency risk and
minimizing loss due to Currency volatility.

Exchange rate fluctuations impact different segments in various ways. When the domestic Currency appreciates, it is
the importers who benefit from it and when the Indian Rupee depreciates, it is the exporters who benefit from it.

However, the level of impact varies from sector to sector and the ability to withstand this impact is also different from
sector to sector. For example, a company dealing in IT and IT-related services usually has a higher margin than an
individual dealing in the handicraft or textile sector. Hence, IT companies have greater capacity to withstand the impact
of Rupee appreciation or depreciation.

We can classify this impact as follows:

Impact on exporters: Strengthening of the Rupee is a nightmare for exporters, while the weakening of the Rupee
boosts their profit margins.

Impact on importers: Strengthening of the Rupee favorably affects an importer as their payments for imported goods
go down when the Rupee appreciates.

Forex Risk Management

As Currency fluctuations can adversely impact importers/exporters, it is very important for them to protect their
exposure in an efficient and effective manner. Every exporter/importer may follow the following steps to manage their
exposure:

Determine risk exposure:

The following will help to determine their risk exposure:

Percentage of sales or purchases (especially receivables and payables) that is done in foreign currencies.

Is the environment such that the importer/exporter is not in a position to pass on the Currency losses by
increasing the prices?

Can the importer/exporter enter into price variance clauses with the other party based on exchange rate
fluctuations?

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Does the importer/exporter have a tight cash flow? Can adverse Currency fluctuation cause problems for the firm?

At what point will a change in exchange rates affect the profitability significantly?

Which Currencies is the firm exposed to and in which Currencies does it have payment obligations?

Determine risk mitigation strategy:

The following strategies may be followed, depending on the level of risk exposure

A. Selective hedging: This is a good method if the importer/exporter has significant but short-term foreign currency
exposure. In such a scenario, he can decide to hedge 30% to 70% of his total exposure and be prepared to benefit or
lose from the unhedged portion.

B. Systematic hedging: Here, the firm hedges the position as soon as it enters into any foreign currency commitment.
As a general rule, the more the business relies on forex cash flows, the more important it is to hedge against foreign
currency risk.

C. No hedging: In this situation, the importer/exporter simply accepts the forex risk. Hedging is not necessary if only an
insignificant part of the total business is exposed to forex risk or if the firm can pass on the entire loss arising from
foreign Currency transactions to its customers.

Determine risk mitigation tools:

Importers/exporters can choose from any of the following tools:

A. Currency diversification: Firms can reduce their currency risk by diversifying the Currency base. For example, firms
can reduce their dependence on USD/INR exchange rates by accepting/placing orders in other Currencies such as Euro,
Yen, etc.

B. Forward/Future contracts: The Forex Future contract is an exchange traded agreement to convert a given amount of
a currency into another at a predetermined exchange rate and on a predetermined date. It is the preferred instrument
for hedging against Forex risks. Currency forwards may also be used. The forward contracts are entered into with
authorized dealers (mainly Banks) in the OTC market while the Futures contracts are entered into on the Currency
Futures exchange.

Traditionally Currency Forwards was the popular way of hedging the forex exposure, but with the advent of Currency
Futures, firms with forex exposure spread some part of their risk mitigation strategies to Currency futures exchange.

Currency Futures are also more liquid as they are standardized contracts traded on exchanges. Although Currency
Forwards can be customized to the needs of the parties involved in the transaction, they are less liquid and are exposed
to counterparty risk.

C. Call and Put Options: Call and Put Options act like an insurance policy. They allow you to profit when exchange rates
move in your favor and also limit your downside when the opposite happens. These are traded on the Currency Futures
market.

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Illustration 1

A crude oil importer wants to import oil worth USD 1,00,000 and places his import order on 15 July 2013, with the
delivery date being four months later. At the time of placing the contract one US Dollar is worth 65.50 Indian Rupees in
the Spot market. Lets assume the Indian Rupee depreciates to INR67.50 per USD by the time the payment is due in
October 2013, then the value of the payment for the importer goes up to INR 67,50,000 rather than the original INR
65,50,000. The hedging strategy for the importer at the time of placing the order would be:

Now

Current Spot rate (15 July 2013) 65.5000 - One USD - INR contract size USD 1,000

Buy 100 USD - INR October 2013 contracts on 15 July 2013 (1,000 * 65.7000) * 100 (assuming the October 2013
contract is trading at 65.70 on 15 July 2013)

Later

Sell 100 USD - INR October 2013 contracts in October 2013 at 67.50

Profit/loss (Futures market)= 1000 * (67.50 65.70) * 100 = 1,80,000

Purchases in Spot market at 67.50

Total cost of hedged transaction (67.50 * 100,000) 1,80,000 = INR 65,70,000. (transaction costs not considered)

Had he not participated in the Futures market he would have to pay Rs.67,50,000 for the import.

Illustration 2

A jeweller who is exporting gold jewellery worth USD 50,000 in July 2013 wants protection against possible Indian
Rupee appreciation in December 2013, i.e. when he receives his payment. He wants to lock in the exchange rate for the
above transaction.

His strategy would now be:

Sell 50 USD - INR December 2013 contracts (on 15 July 2013) 65.90 - One USD - INR contract size USD 1,000

Later

Buy 50 USD - INR December 2013 contracts in December 2013 at 65.10

Sell USD 50,000 in Spot market at 65.10 in December 2013 (assuming that the Indian Rupee appreciated to 65.10 per
USD by the end of December 2013).

Profit/loss from Futures (December 2013 contract) 50 * 1000 *(65.90-65.10)

= 0.80 *50 * 1000 = Rs 40,000

The net receipt in INR for the hedged transaction would be: (50,000 *65.10) + 40,000 = INR 32,95,000.

Had he not participated in the Futures market, he would have got only INR 32,55,000.

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Analyst: Subash Gangadharan (subash.gangadharan@hdfcsec.com)

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai
400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475.

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