Indian exporters boost euro hedges after rally to near two-year high

Representative image. The Federation of Indian Export Organisations (FIEO) has sought these demands in a letter to the finance minister on February 8.

Some Indian exporters are stepping up hedges of their future euro receipts on bets of limited upside to the rupee after the common currency's recent rally, analysts said.

The EUR/INR pair soared to 90.44 on Feb. 2, just ahead of the European Central Bank meeting, its highest level since April 2021. It was last trading at 88.30.

There is an urgency among exporters to hedge following the euro's rally to above 88, a treasury sales official at a private bank said.

"In the portfolio that our bank manages hedging has gone up for around 70% of customers," said another treasury sales official at a private bank who advises medium to small enterprises. It had nearly dried up about two months ago, the official added.

The EUR/INR premiums are almost twice the USD/INR premiums, encouraging exporters to take longer-term hedges.

The EUR/INR 1-year annualised premium is at 4.20%. This means that an exporter who is hedging at the current spot rate of 88.30 would have a 1-year hedging rate of nearly 92.

"Exporters to Europe have added 30-40% hedges on receivables from their outstanding books," said the first treasury sales person quoted. "We have been pushing clients and they've been open to it."

The EUR/INR cross rate jumped almost 11% in the December quarter, thanks to a plunge in the dollar index and a weaker rupee.

"EUR/INR saw a large movement.... and if you add the premium , it is a very good rate to hedge currently (for exporters)," said Jayaram Krishnamurthy, head of research and advisory at Almus Risk Consulting.

There is a lot of uncertainty on the outlook for the euro and the overall dollar, Krishnamurthy said, pointing out that he is advising his clients to hedge.

The dollar has seen a resurgence against its major peers after robust U.S. jobs data led to a repricing of Federal Reserve rate hike expectations. The Fed's terminal rate expectations have reached 5.15%.

"It's more of a dollar story rather than a euro story," Arnob Biswas, head FX research at SMC Global Securities. He expects the EUR/INR to move to near 84-85 in the next six months.