FAQs

Today for to be competitive in export markets as well as in local markets it is necessary that your company controls the finance cost and interest cost of borrowed funds. Interest rates in India are high ( due to high inflation historically and anticipated higher economic growth rate as compared to developed countries). In US and in other developed markets cost raising money i.e. interest rates are low. Hence if your company need to borrow at competitive rates. FCY borrowing is the option which is available to fund your long term and short term borrowings.

This is a very important question. Although Indian corporate in the past have borrowed in FCY at cheap rates and enjoyed the benefits of lower finance cost – this is not entirely risk free. Exchange rate movements especially USD / Euro / Yen affect the principal and interest payments of these loans. Hence corporate can not borrow in foreign currency and forget. We have number of Indian corporate who knowingly or unknowingly did not take effective risk covers and have lost due to unfavourable exchange movements.

Managing currency risk and by monitoring exchange rates / global events / economic data and take effective hedges or insurance to cover the FCY borrowing risk is one of the important step. Banks do provide such products however for it is necessary to study company’s cash flows in FCY and decide on appropriate strategy..

The tools available for hedging the FCY risk have to be properly evaluated and should be used very carefully. Considering the cash flows of the company only the portion of the risk is to be covered at appropriate levels and time. Company should never take speculative positions and if need be cut the positions at appropriate levels. If these steps are not followed and company management is un-thoughtful and knowingly or unknowingly starts to take undue risks then company is open to huge losses. It is very necessary that only products which suitable to company are used and company management always follows the pre approved FCY Risk Policy to avoid any losses on account of these products.

This is where Orbit Consultants would help you. We can frame these policies based on general RBI guidelines on FCY borrowing. Further these policies should provide guidance to the company officials as to how the approved risk management policy is implemented and the fix associated responsibilities and duties of authorised officials. Orbit can monitor your risks and give you prior instructions for implementing policy terms so that Risk Management Policies are very effectively managed with the company.

Hedge products ensure that company mitigates the risk of FCY borrowing due to adverse exchange rate movements. However company needs to ensure that necessary covers are bought against such risks. Thus company should first of all evaluate the risks and at appropriate levels and at appropriate time should cover these risks. Cost of covering these risks should be evaluated so as to achieve the targeted reduction in finance costs. This can only be done when company has pre-defined Risk Policy which delegates the authorities to cover such risks at appropriately. Orbit will help you in not only framing Risk Policy, but to also take measures at appropriate time for successful implementation of Risk Policy so that company is not open to any undue and un-predicted risk on FCY borrowings or for the matter hedge products used to cover the risks.

There are no such free rewards. Risk have to be taken and measured. Reward have to be evaluated and booked. For this we need to monitor risks and action on them at appropriate time. One needs to invest wisely and use effective products to achieve rewards.