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Betting on stable rupee and low US rates, more forex swaps of rupee loans for dollar liabilities
In the summer of 2007, when the euro and Swiss franc surged against the dollar, many Indian firms - small exporters ignorant of financial markets as well as large corporates with sophisticated treasuries - were badly bruised as their currency derivative bets backfired. Companies raised a hue and cry, banks went on the back foot, disputes reached courts, and later, the regulator changed rules to kill the market for exotic derivatives. After a long lull, currency derivatives are now slowly making a comeback, albeit on a cautious note and with plain-vanilla offerings.
Betting on stable rupee and low US rates, greater swap of rupee loans for dollar liabilities Hit by high lending rates and lower earnings, many companies are taking a different bet this time. Based on calls that the rupee will not slip further and the dollar interest rate will remain low for some years, they are swapping their expensive rupee loans for dollar liabilities. It's a transaction that can lower interest costs and prop up profits. The risk, however, is that if the rupee depreciates fast enough, gains from the lower interest rate will be more than wiped out.