Importers are rushing to hedge their dollar positions amid the sharp depreciation of the rupee against the American currency and expectations of further volatility even as exporters are holding off after suffering mark-to-market (MTM) losses on earlier hedges.
Market insiders say the surge in hedging costs may deter companies from raising dollar bonds now though some may still tap the market if they expect the rupee’s downside to be limited.
The rupee extended its losses on Thursday to touch a fresh low of 90.41 as capital outflows continued, coupled with lingering uncertainties over trade negotiations with the United States (US), and this weighed on market sentiment, dealers said.
The rupee gained back all its intraday losses to close at 89.98, improving from the previous close of 90.20, on the back of dollar sales by foreign banks.
Dealers said there was limited intervention from the Reserve Bank of India (RBI). The domestic currency earlier this week stumbled past 90. In less than a year, the rupee has slid from 85 to 90.
This is the second quickest fall since the taper tantrum (2013).
The rupee was hovering near 88.5 in mid-November. It has depreciated more than 5 per cent this financial year (FY26) and 4.85 per cent this calendar year.
Additionally, the rupee has been the worst-performing Asian currency even though the dollar index has been trading below 100.
“…the root cause of the structural weakness in the rupee can be attributed to a challenged balance of payments (BoP) position that is expected to sustain over 2026 as well,” ICICI Bank said in a report, adding that the exchange rate was expected to move from 89.50-91.00 to 92.00-93.00 by December next year, with upside risks to these projections.
RBI intervention will likely remain in place to limit the pace of rupee depreciation, not to reverse the trend, the report said.
According to Ritesh Bhansali, deputy chief executive officer, Mecklai Financial Services, with the forward premium currently around 2.5 per cent and rupee depreciation nearing 4.5 per cent, depreciation is outpacing the premium, resulting in an opportunity loss for exporters, who hedged earlier at lower levels.
Those who hedged earlier are receiving rates below the spot rate, and with the rupee continuing to weaken, exporters are sitting on negative MTM positions on their outstanding forwards.
Consequently, they are not hedging aggressively and are largely waiting on the sidelines, he said, adding that importers, however, are panicking and increasing their hedging, which had driven forward premiums higher, he said.
The one-year rupee forward premium stood at 92.24 and has increased from 90.81 on October 31.
Market participants say persistent dollar demand on any dip suggests that recovery in the rupee is likely to be shallow and short-lived, even as the RBI intervenes to smooth volatility rather than halt the move.
While a sharp decline in the rupee appears unlikely, further depreciation into next year remains the base case.
“The expectation that the rupee may depreciate further can prompt importers to hedge — a trend visible for some time.
"As a result, hedge ratios have improved, and we are likely to see a further buildup in hedging demand.
"Exporters, on the other hand, may now wait for better rates,” said Dhiraj Nim, economist/forex strategist, ANZ Research, adding that if exporters believed the RBI would intervene to protect a certain level, they might convert their receivables and sell dollars.
The RBI now appears to be protecting the 90.30–90.40 range, he said.
Experts say the challenge is that when the RBI defends a level, it tends to create additional short positions, and on the due date the dollar moves up against the rupee, making exporters reluctant to sell.
When the RBI is short, it will eventually cover, leading to further depreciation in the rupee.
Additionally, fundamentals have not supported the currency, and until India runs a trade surplus, the trend will likely continue.
“Importers remain unhedged to a certain extent, but they have been buying dollars and their strategy is likely to shift.
"Any dip in the rupee will now become a buying opportunity, and importers will be more inclined to hedge their exposures.
"For exporters, a more prudent strategy is to buy ‘puts’ and stay protected, and to sell on a spot or cash basis rather than through forwards, which have only resulted in MTM losses,” said Anil Bhansali, head, treasury, Finrex Treasury Advisors.
Nim said: “Companies planning to raise funds through dollar bonds may also choose to wait because hedging costs have risen.
"They are additionally likely to hold off until the US Federal Reserve cuts rates, which would bring down their borrowing costs at a time when hedging expenses are already elevated.”
Bhansali said: “While some companies may delay tapping the dollar bond market, others, particularly larger firms, may still proceed with it if they believe incremental depreciation from current levels will be limited.”
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