There is a huge lack of transparency of forex rates in India. Various ways to overcome this challenge and ensure complete transparency are:
- Access to real-time forex spot and forward rates
- Understanding forex transaction type
- Learning forex rate calculation methodology for each transaction type
- Fixing bank margin (bank charges on forex conversions)
Real-time forex rates available on public domains (websites) are delayed by 5-10 minutes. Real-time forex rates are available at data terminals like Thomson Reuters, Bloomberg LLP, etc. and they are expensive for MSMEs. Myforexeye strives to improve forex rates transparency through its mobile application by providing real-time forex rates for each transaction type along with all the calculation methodologies.
Should exporters or importers hedge when the Rupee is consistently weakening?
Myforexeye researched on USDINR for the last 21 years compared 3 months, 6 months, and 9 months forward rates with their respective spot on maturities. The research findings show that average annualized forward premiums are 4%-4.5%, while the average annual rupee weakening is 2.7%. An opportunity for exporters to regularly hedge using forward contracts and gain the differential of 1.3% to 1.75% per annum. The success ratio of forwards better than a spot at maturity is 65%. On a consistent long-term basis, forwards eliminate currency risk and also improve profitability. A corollary for importers – they can keep lower hedge ratios.
Optimizing Interest cost for exporters
All MSME exporters can avail of packing credit, and such export working capital funding can be taken in foreign currency (PCFC) or Indian Rupee (PCINR). Till September 30, 2021, the Government of India had given an Interest subvention for availing packing credit in INR. Following is the comparison between PCFC and PCINR:
1.When interest subvention is available
PCFC ($) | PCFC (€) | EPC (INR)$ | EPC (INR)€ | EPC (INR)$ | EPC (INR)€ | |
ORGANIZATION TYPE | MSME / Non-MSME | MSME | Non-MSME# | |||
6M LIBOR | 0.2% | 0% | - |
| - |
|
SPREAD | 2.0-2.5% | 2.0-2.5% | - |
| - |
|
PCL INTEREST | - | - | 7 - 8% | 7 - 8% | 6% - 7% | 6% - 7% |
INTEREST SUBVENTION | - | - | (-) 5% | (-) 5% | (-) 3% | (-) 3% |
FORWARD PREMIUM | - | - | 4.5% | 5.5% | 4.5% | 5.5% |
TOTAL COST | 2.2-2.7% | 2.0-2.5% | 0% to -ve | 0% to -ve | 0% | 0% to -ve |
#For eligible ITC (HS) Codes
$EPC repayment from dollar export
€EPC repayment from euro export
1.When interest subvention is not available
PCFC ($) | PCFC (€) | EPC (INR)$ | EPC (INR)€ | EPC (INR)$ | EPC (INR)€ | |
ORGANIZATION TYPE | MSME/Non-MSME | MSME | Non-MSME# | |||
6M LIBOR | 0.2% | 0% | - | - | - | - |
SPREAD | 2.0 - 2.5% | 2.0 - 2.5% | - | - | - | - |
PCL INTEREST | - | - | 7% - 8% | 7% - 8% | 6% - 7% | 6% - 7% |
FORWARD PREMIUM | - | - | 4.5% | 5.5% | 4.5% | 5.5% |
TOTAL COST | 2.2 - 2.7% | 2.0 - 2.5% | 2.5 - 3.5% | 1.5 - 2.5% | 1.5 - 2.5% | 0.5 - 1.5% |
Thumb rule: If interest subvention is available, take PCINR, hedge using a forward, and lower the interest cost. If interest subvention is not available, evaluate the cost elements of PCFC vs PCINR and select the cheaper source of funding.
Myforexeye Mobile Application
Myforexeye mobile application strives for complete transparency of forex rates for all types of forex transactions. It provides real-time market prices for all generally used currency pairs. The application features an award-winning “Rate Alert” function that can put market rate alerts for any transaction type. Additionally, there are exhaustive forex market research (including news, case studies, daily and weekly updates, economic calendar, etc.), forex trading signals (for financial market traders), facilities for personal forex needs, etc. It is a must-use mobile application for all exporters and importers in India.
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