Financial Foresights Jan13

8/12/2019 Financial Foresights Jan13

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Financial Foresights

FEDERATION OF INDIAN CHAMBERS OF COMMERCE AND INDUSTRY

Foreign Exchange Risk Management


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FULL PAGE ADfor Digest PartnerSize- W-8, H-11.25Screen Ruling- 150Ad Color- CMYK


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About FICCI


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DISCLAIMER

Acknowledgments

We thank our Partners

Partner Exchange

Industry Insights Partner


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Contents1. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

2. INDUSTRY INSIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7The Risk Management Imperative 9

Role of Foreign Exchange Risk Management in Indian Corporate Performance 17

Divining the Rupees future 21

The macroeconomics of managing the rupee 25

Foreign Exchange Risk Management 30



Foreign Exchange Risk Management for Corporates 42

A perspective on the trends in the foreign exchange market and identifying and

managing foreign exchange risk 46





Foreign Exchange Risk Management-The way forward 69

3. THE POLICY PULSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

Banking Sector 76

Capital Markets Sector 79

Insurance Sector 82

Reforms Tracker

4. FICCIS DATA CENTRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87

Indian Economy-An Update 89

Investment Banking Updates 92

Markets Watch 97

5. FINANCIAL SECTOR EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

Synopsis of Past Events 98

6. FINTAINMENT SECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99


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Preface

Dr. A. Didar Singh

Secretary General

FICCI


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Industry Insights

In association with


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9Foreign Exchange Risk Management

Industry Insights

The Risk Management Imperative

Mr. V.K. Sharma,

The last two years

have been characterized

by unprecedented and

excessive volatility in

asset prices and currencyvalues, catapulting the

critical imperative of

Risk Management to the

centre-stage like never

before

________________________________________________________________________________________________________


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Industry Insights


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Industry Insights


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12

Industry Insights


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Industry Insights


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14

Industry Insights



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Industry Insights

As regards commodity

prices, business

and industry canuse international

commodity exchanges

to hedge dollar price

risk, and domestic

commodity exchanges

to hedge rupee price

risk


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16

Industry Insights

V.K. SharmaExecutive Director

Reserve Bank of India


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Role of Foreign Exchange RiskManagement in Indian CorporatePerformance

Mr. B.A. Prabhakar,

The economic

liberalization hasfacilitated theintroduction ofderivatives basedon interest rates andforeign exchange


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18

39

41

43

45

47

49

51

53

55

57

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


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Role of the Boards in ForexRisk Management

Role of Banks in Forex RiskManagement

Companies incurred huge forex losses

No Company

2007-08

3


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20

Industry Insights

Forex Risk Management-Accounting Standards

Way forward

It is essential

for corporates to

implement systematichedging action plan

so that any adverse

movements in

currency rates will

not cause pressure

on their margins and

B A PrabhakarChairman & MD

Andhra Bank


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Industry Insights

Divining the Rupees futureMr. Saugata Bhattacharya and Mr. Abhishek Upadhyay

Just as death and

taxes are the two

constants of life, forex

markets have become

the polar opposite in

terms of volatility


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22

Industry Insights


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Industry Insights

80

85

90

95

100

105

110

115

120

125

130

Oct-10 Mar-11 Jul-11 Dec-11 Apr-12 Aug-12 Jan-13

CNY - China

BRL-Brazil

MYR - Malaysia

INR - India

KRW - Korea

TRL - Turkish

90

95

100

105

110

115

120

Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct- 10 Apr-11 Oct-11 Apr-12 Oct-12

REER (6 country trade based, 2004-05=100)

Mean+ 1SD

Mean- 1SD

(April'04:USDINR - 43.9)

(July'12: USDINR -

53.05)

47%

56%50%

53%

60%67%

79%

97%

114% 116%

99%

106%110%

0%

30%

60%

90%

120%

FY93 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Total external flows as % of GDP

Trade flows % GDP

Financial flows % of GDP

Chart 1: Comparative performance of Rupee

and other EM currencies

Chart 3: Real Effective Exchange Rate

Chart 2: Indias integration with the

global economy

Indias growth is too

strong an attraction

for the vast pools ofglobal capital in quest

of returns


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Industry Insights

38

42

46

50

54

58

62

70

75

80

85

90

95

Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

DXY Dollar Index USD/INR (RS, Inverted)

Chart 1: Comparative performance of Rupee and

other EM currencies

Abhishek UpadhyaySenior Manager and

Economist, Axis Bank

Saugata Bhattacharya

Senior Vice President and ChiefEconomist at Axis Bank

Russia 2.9 10.0 0.7 5.3 97.6

Brazil 4.2 5.2 -2.5 -1.5 65.4

India 8.1 9.2 -7.8 -2.3 72.5

S.Africa 2.7 7.0 -2.7 -4.9 52.0

Mexico 1.5 4.4 -2.9 -0.8 42.4

Turkey 3.6 8.1 -2.5 -6.0

Korea 3.5 3.4 1.6 2.3 32.4

China 10.5 3.7 -1.2 6.5 22.7

US 0.6 2.2 -8.5 -3.8 86.9

UK 0.1 3.2 -7.3 -2.1 64.5

Japan -0.1 -0.2 -7.2 3.3 206.0

Fiscal balance

as % of GDP

CAD as a % of

GDP

Govt debt as

% of GDP

GDP

yoy%

Inflation

yoy%

Table 1


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Industry Insights

Three phases of RBI policy

The macroeconomics of managing the rupeeMr. Indranil Sen Gupta,

INR will not

stabilize till the RBI

rebuilds FX reserves


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Industry Insights

Till 2004: Buying FX tobuild reserves

2005-07: Buying FX to stemappreciation

2009-11: Strong INR at costof FX reserves

Cyclically high current challenge

38.0

42.0

46.0

50.0

54.0

58.0

M ar -

00

M ay-

01

J ul-

02

S e p -

03

N o v -

04

J an -

06

M ar -

07

M ay-

08

J ul -

09

S e p-

10

N o v -

11

INR / USD

Chart 1: Forex reserve management key to stabilize Rupee


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Industry Insights

Higher FX reserves,stronger INR

4

6

8

10

12

14

16

18

FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12

Import cover

Months

Chart 2: Import cover lowest since FY96

Item FY10 FY11 FY12 FY13


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Industry Insights

Higher nostro balancescan fund US$5-8bn FXintervention

The Rupees Dilemma

1. RBI buys FX, market buys INR:

2. RBI doesnt buy FX, market sellsINR:

Table 2: Indias external indicators are trailing BRIC levels

Pre-Crisis Crisis Current

Brazil

Russia

India

China

4

6

8

10

12

14

16

18

FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12

Import cover

Months

Chart 2: Import cover lowest since FY96We think the best

solution surely will

be for the RBI to

accumulate FX and

the FX market to

buy INR. The RBI

should then achieve

its twin objectives

of stabilizing the FX

market and reducing

pressures


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Industry Insights

3. RBI buys FX, market sells INR:

4. RBI doesnt buy FX, market buys

INR:

Sen Gupta, IndranilEconomist India


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Industry Insights

O

Foreign Exchange Risk ManagementMr. Vipul Chandra,

Asian Companies

have been severely

impacted by this

increased volatility

in FX Markets


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Industry Insights

Interplay between Financial and

Business risks:

Risk Management Process

95% CFaR

Forecasted

Firm Value

Firm Value Rs MM


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Industry Insights

3. Setting Risk Strategy:

4. Hedging Strategy and Alternatives

evaluation:

5. Review and Re-balancing :

Accounting and RiskManagement


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Industry Insights

Vipul ChandraManaging Director

Corporate Sales & Structuring -

South Asia Markets


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Industry Insights


Introduction

Mr. Himanshu Kaji,

Ministry of Corporate

Affairs has taken the

cognizance of high

rupee volatility and

has permitted Indian

companies to capitalize

term foreign borrowings

due to exchange rate


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Industry Insights

Risk Awareness

Risk Management StrategiesRisk Transfer Strategy

Risk Avoidance Strategy

Risk Mitigation Strategy

Hedging through Exchanges


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Industry Insights

Hedging through OTCcontracts

Right Risk Strategy:

Recommended Exchangerelated reforms

Low liquidity on the

exchanges across the

existing contracts

is one of the key

concerns for the

Indian companies


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Industry Insights

Recommended OTC relatedreforms

Conclusion

Himanshu Kaji

Executive Director,Edelweiss Financial

Services Limited


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Industry Insights

Mr. Baby K P,


In life, as in chess,forethought wins.


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Industry Insights

Foreign Exchange RiskManagement framework

and exchange rate risks

3.

Forecasting exchange rate

movements

Factors affecting exchange

rate

Movement of Capital:

Interest Rates:

Current account position:

Public debt:


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Industry Insights

Measurement of risk

Benchmarking andformulation of policyguidelines

Risk mitigation

Forward contracts,

Currency options


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Industry Insights

Option contracts maybecombined to form strategies that

reduce cost and achieve desired pay

Currency futures

It is obvious that

multiple currencies

are here to stay forthe foreseeable

future and so is the

foreign exchange risk

Baby K P Asst General Manager,

Federal Bank


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Industry Insights

Foreign Exchange Risk Managementfor Corporates

Why manage foreign

exchange risk?

Mr. Mohan N. Shenoi,

In India, the gradualliberalization of theIndian economy afterthe 1990s and itsintegration into theglobal marketplace hasresulted in substantialexposure to foreignexchange risks forIndian corporates


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Industry Insights

How is foreign exchangerisk managed?

start by isolating andenumerating the currency exposures

A. Transaction Risk:

B. Translation Risk:

C. Contingent Risk

D. Economic Risk:

E. Policy Risk:

The risk management

policy should be

primarily driven

by the business thecompany is in


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Industry Insights

How can foreign exchangerisk be managed?

Recent Lessons

Hedge accounting:


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Industry Insights

RBI regulations:

Mohan N. ShenoiPresident- Group Treasury

& Global Markets

Kotak Mahindra Bank

Limited


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Industry Insights

A perspective on the trends in the foreignexchange market and identifying and managing

foreign exchange risk

Introduction

.

Mr. Ramaswamy Govindan,

As the liquidity across

markets dried up,

challenged the micro-structure of foreign

exchange markets

across many countries

with increased

volatility


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Industry Insights

Global FX Markets Deep,liquid but volatile

The FX market in India


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Industry Insights

Foreign Exchange RiskManagement L&TPerspective

Risk management processinvolves following elements:-

Under this

stricter operating

environment, anincreasing number of

corporates, especially,

the medium scale

enterprises have found

with the regulatory

requirements.


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Industry Insights

Risk Evaluation:

Risk Mitigation:

Risk monitoring:

Ramaswamy Govindan

Toubro Limited.

References

Indian Derivatives Market a regulatory and Contextual Perspective - RBI Speeches

BIS Triennial Survey 2007 & 2010 ww.bis.org

Report on Currency & Finance RBI Publications


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Industry Insights

Foreign Exchange Risk ManagementSmt. Usha Ananthasubramanian,

The Backdrop

ation and

Globalisation

has yielded

magnanimous scope

for internationalbusinesses


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Industry Insights

Indian Perspective ToEconomic LiberalisationAnd InternationalBusinesses


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Industry Insights

Foreign Exchange Risk

3.

1. Exchange Rate Risk:

Exchange Rate Risk

Forex Forward contracts:

Currency Futures:


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Industry Insights

Currency Options:

Cross Currency Swaps: A

Interest Rate Risk:

Forex Exposure

Hedging Instrument

Unhedged Company

Effect of Hedging

Money saved by hedging: 60,150,000 58,000,000 = Rs 2.15 mio

Graphical Representation of Currency Option Payoffs


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Industry Insights

Interest Rate Risk

Sovereign risk Compliance Risk:

compliance risk

Settlement risk:


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Industry Insights

settlement risk

Summary and Conclusion

The need of the hour

is to educate ourselves

with the vibrantderivative products

and participate

effectively in the

derivatives market to

help it evolve to its

optimum levels

Usha AnanthasubramanianExecutive Director

Punjab National Bank


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Industry Insights

Domestic Scenario


Shri Nishant Jha, Shri Selvaraj Kalyanasundaram,

Human beings, who

are almost unique in

having the ability

to learn from the

experience of others,

are also remarkable

for their apparent

disinclination to do

so.


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Industry Insights

India Highly Exposed toExchange Rate Fluctuations

Sources of Risk forCorporates

Exchange Rate RiskManagement

Risk Measurement


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Industry Insights

Risk Control and

Mitigation Hedging


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Industry Insights

Hedging Products in India

3.

Companies should

break even exchange

rate based on their

costing and then

hedge the risk after

accounting for some

margin


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Industry Insights

3.

Documentation - ISDAMaster Agreement andCSA

Move TowardsTransparency ExchangeTraded Products and CCPs


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Industry Insights

Nishant Jha

Selvaraj KalyanasundaramDeputy General Manager


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Industry Insights

A

.

.

Foreign Exchange Risk ManagementMr. James Berry,

The global FX

turnover has tripled

between 2001 and

2010

________________________________________________________________________________________________________


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Industry Insights

3.

________________________________________________________________________________________________________

3

With the Indian

economy expanding

at circa 6% p.a, thereis an increased

focus on FX risk

management


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Industry Insights

James Berry

India & South Asia,

Standard Charted Bank


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Industry Insights

Hedging of market risk

Foreign Exchange Risk ManagementMr. Ananth Narayan G,

I will never die for

my beliefs; because I

might be wrong


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Industry Insights

So what should the


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Industry Insights

Managing market

risks has become a

critical imperative

of every corporate

treasury



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Industry Insights

In Summary

Ananth Narayan GCo-Head of Wholesale

Banking, South Asia.

Standard Charted Bank


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Industry Insights

Introduction

Foreign Exchange Risk Management-The way forward

Mr. Apoorv Srivastava,

In India, the economic

liberalization in the

early nineties provided

the economic rationale

for the introduction of

Foreign exchange (FX)

derivatives


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Industry Insights

Foreign Exchange Risk: AHistorical Perspective

Need for a dynamic foreignexchange market in India:

________________________________________________________________________________________________________


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Industry Insights

Issues in the Indian market:

Impact of Global economyand the India story


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Industry Insights

3.

Way Forward:

Recommendations:

The problem in the

Indian context is

that the market for

derivatives in India

other than forward

contracts is veryshallow


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Industry Insights

References:

3.

Apoorv SrivastavaResearch Associate - Financial Sector

FICCI

Disclaimer: Views are personal and not of the organization.


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The Policy Pulse


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The Policy Pulse

December, 2012

RBI plans to push Export Lending

Companies in Agri Business now in Priority

Sector

RBI plans to roll out gold linked products

Gold deposit schemes

Gold - linked accounts

Gold accumulation plan

Banking Sector


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The Policy Pulse

Gold Pension Plan

Figures on Gold Imports

RBI bans bank loans to buy gold in any form

RBI to simplify KYC norms

RBI trying to mesh current liquidity, Basel-III

norms

www.mcx-sx.com

Indias

new generationstockexchange

offershedgingin

,, and$

Manage your currency risk in

Yen, Euro, Pound and USD


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RBI to set aside funds for buying illiquid gilts

payment system

The Policy Pulse


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SEBI allows Mutual Funds to take part in credit

default swaps market

SEBI relaxes MF exposure for Housing Finance

companies

SEBI allows trading of ETFs in SLB segment

Capital Markets Sector

SEBI seeks more powers to deal with defaulters

SEBI comes out with norms for RGESS and asks

stock exchanges to furnish list of eligible stocks for

RGESS

.

Government asks States to act against illegal

share trading

The Policy Pulse


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SEBI Committee to review depository system

Government may cut withholding tax on FII debt

SEBI discontinues mini derivatives contracts on

bourses

SEBI allowed 12 more Alternative Investment

Funds in October and November 2012

.

SEBI raises minimum capital requirement for

brokers

www.mcx-sx.com

Hedge on

Insure

againstuctuating

currency

prices

The Policy Pulse


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SEBI takes measures to beef-up retail investor

safety

Companies Act gives SEBI a leg-up

Inc.

SEBI seeks approval for foreign funds inalternative investment funds

SEBI eases debt allocation mechanism for FIIs

SEBI to revise rules on insider trading; to

synchronize norms with the guidelines of

Companies Bill

SEBI mulls norms for trading permitted stocks on

exchanges

The Policy Pulse


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Standard insurance product for rural and social

sector: IRDA

Finance Minister announced incentives to

promote life insurance

applications

Insurance Sector

SEBIs unveils share buyback proposals

Government asks SEBI to remove cool-off period

in OFS

The Policy Pulse


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IRDA gears up to deliver better and faster product

decisions

Insurers eye tier II and tier III cities to evaluate

new business statistics

Premium collection drops for life insurance

companies

Insurance Firms being investigated for suspected

nonpayment of Service Tax

www.mcx-sx.com

SMS MCXSX CurrencyCode

to567678

Currency codes:

USDINR /GBPINR/JPYINR / EURINR

CurrencyFuturesPricesonmobile

The Policy Pulse


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Motor Insurance Policy Tenure may rise to 2 Years

soon: IRDA

Cabinet defers decision on Insurance and Pension

reforms bill

Reforms Tracker: A Review of the Winter Session

of Parliament and Bills Passed

IRDA relaxes proof of residence norms for micro-

insurance products

Reforms Tracker

www.mcx-sx.com

Hedge on

Insure

against

uctuating

currencyprices

The Policy Pulse


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Bills Introduced In

Lok Sabha

Bills Passed By Lok

Sabha

Bills Introduced

In Rajya Sabha

Bills Passed By

Rajya Sabha

Bills Passed By

Both Houses

1. The Coal Mines

Amendment Bill, 2012

2. The Central

Universities

2012

3. The Criminal Law

2012

4. The Competition

2012

5. The Appropriation

6. The Governors

Allowances


7. The Constitution

1. The Prevention of

Money Laundering

2. The Unlawful Ac-


3. The Enforcement of

Security Interest and

Recovery of Debts Laws

4. The Appropriation

5. The Constitution

-

Bill, 2012

6. The Banking Laws

7. The Companies Bill,

2012

1. The Child

Amendment Bill,

2012

1. The North

Eastern Areas

Amendment Bill,

2012

1. The North

Eastern Areas

Amendment Bill,

2012

Winter Session, 2012

The Policy Pulse


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Enforcement of Security Interest and Recovery of

The Companies Bill, 2012

The Policy Pulse


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FICCIs Data Centre


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FICCIs Data Centre

Indian Economy-An Update

Economic Scenario

3.

Key Economic Indicators


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FICCIs Data Centre


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FICCIs Data Centre

Rupee Movement

Reference:

3.

Informationis

justaTweetaway

Follow mcxsx_currencyfor

currency price updates

Follow mcxsx for Exchange

news and developments

http://twitter.com/mcxsx


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FICCIs Data Centre

India

Outbound M&A

Inbound M&A

Domestic M&A

Investment Banking Updates

Mergers & Acquisitions


93/104


FICCIs Data Centre

Equity Capital Markets


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94

FICCIs Data Centre

India DCM

Corporate IG and Agency

Reliance Industries Power

Finance Corp

Domestic DCM

International

Debt Capital Markets


95/104


India loan

Leveraged

Investment grade

Building

Loan Markets

FICCIs Data Centre


96/104

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IB Revenue

India IB Revenue

Syndicated Loan revenue

M&A revenue

ECM fees DCM fees

FICCIs Data Centre


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FICCIs Data Centre

Markets Watch


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Financial Sector Events

Synopsis of past events

Asian Financial Cooperation Conference26th- 27th November, 2012, Mumbai


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Across

Down

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Fintainment Section

CrosswordNotes:

Fintainment Section


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Greenspan Put -

Dogs of the Dow

Squawk Box

and Business Research, by 2015 which city is expected to employ

Roth and Lloyd Shapley in 2012, the Nobel Prize in Economic

last working day of February. What is the name of the Finance

Minister who changed the budget announcement time to

11am?

Log on tohttp://m.mcx-sx.comon your internet enabled handset

Currencyfutures

onyourmobile

Financial Fundas

Fintainment Section


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1. StockTwits

2. FRED

3. IRDA

Jumble

Mangesh Ghogre

Fintainment SectionCredits

Fintainment Section


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I1

N S2

U R A3

N C4

E F5

I I P6

L C7

N U D R D D

D8

E B T O R E9

Q U I T Y C10

R R

E S D A

X I I P11

L12

T D13

D

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E A L T C

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A R T E L C

R16

Y O A O O F

B E17

C18

R I S I S P

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N C20

C21

F O H P22

U N T E R23

O O M24

B A E I E

N N P C O C

N25

A T I O N A L I26

Z A T I O N E

P A M N S U SA

27

N N U I T Y S28

E N S E29

X S

G C U U I

I30

P O S31

E C E32

M B A R G O O

O N

Answers of

Answer: 1

Answer: 2

Answer: 3

Answers of Jumble

Answer 1: a - b - c - d - e - f -

Answer 2: a - b - c - d - e - f -

Answer 3: a - b - c - d - -

Solution of Fintainment Section

Fintainment Section


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Established in 1927, FICCI is the largest and

oldest apex business organisation in India,

FICCIs stand on policy issues is sought out by

think tanks, Government and academi.

Why Partner with FICCI

If already with Ficci, read on to know

what else awaits you:

For any Feedback, Comments,FICCIs Membership & Advertisements in

Financial Foresights

Mr. Apoorv Srivastava

Editor-Financial Foresights

INDUSTRYS VOICE FOR POLICY CHANGE


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Documents

Financial Foresights Jan13