A glimpse on why Indian corporates disregard FX hedging

It is noted that more than 50% of Indian companies in the BSE 500 index (excluding banking and financial services) have operating structures that have net foreign currency expenditures.

They are debt driven companies who are likely to experience decline in operating margin as FX spending may decline due to currency depreciation. 

The RBI's big worry is the extent of these unhedged exposures of such corporates.

While the cost of hedging (as indicated by the onshore forward implied yield) is now lower than at the end 2013 when the currency crashed as taper tantrum reigned.

It is still at elevated levels. However, for India, a fairly stable INR has resulted in the corporates neglecting the risk of unhedged exposures.

The successful attempt of reduced currency volatility by RBI, some corporates have started to believe that in the event of sharp INR depreciation, RBI would step in.

RBI has of late stayed away from the forex market and abstained from sucking in or supplying dollars as it has done in the past.

The resultant increased volatility may have had some effect, as available information suggests that hedge books of some corporates have shown some increase.