EEFC order raises risk of additional volatility: Bajaj Auto

After the RBI issued a directive stating that exporters will be required to convert 50% of their foreign exchange holdings into rupees, the Indian currency has reacted. Exchange Earners' Foreign Currency (EEFC) account holders have also been asked to buy forex only after the existing balance has been used.

Companies from various sectors are expected to be affected by this development. In an interview with CNBC-TV18, Kevin Dsa of Bajaj Auto talks about the impact that it can have on exporter companies. He said, it creates a little bit of additional volatility for them.

"With the EEFC balance coming off 50%, they are to some extent exposed to the risk of volatility of the exchange rate on the date of the contract," explained Dsa.

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q:Potentially, what kind of impact the changes announced by Reserve Bank could have for a company like yours and what kind of balances do you guys keep in EEFC accounts?

A: It creates a little bit of additional volatility for us, a risk that is taking place. The money that is kept in the EEFC account is in dollars and the dollar account is used to cover up or to exchange the hedged portion, if it is posted as a deliverable. That is range cover that we take. If the spot rate on the date of the contract expires within that range, then the contract does not become deliverable.

But, if the range goes beyond that, then you have the contract that gets deliverable. The dollar amount that is kept in the EEFC account is utilized to make good, but deliverable portion. With the EEFC balance coming off 50%, they are to some extent exposed to the risk of volatility of the exchange rate on the date of the contract.

Q: Typically, can you tell us whether this will expose you to any kind of earnings vulnerability because of the adjustments that you are talking about on the day of the contract?

A: It could have impact but I don't think it is significant at all. It all depends on the spot rate of the rupee on the date when the contract matures, which normally in our case is at the end of the month. My best estimate would be not more than Rs 2-3 crore.

Q: Per month?

A: Yes and this on the presumption that the rupee keeps appreciating at this point.

Q: What kind of cash balance percentage companies on an average keep in this EEFC account because we are hearing numbers ranging from 50% to 15% and on this forward conversion as well, that is repatriation of money, do you think that will cause some worries for other companies as well?

A: It all depends on each company's philosophy. I won't make a general statement on that matter. As far as we are concerned, we keep the money in the EEFC account purely to ensure that there is no risk of exchange rate, risk to the company on the date of the contract maturing.