Article on “Risk Mitigation in FX & Financing” by Mr. Adwait Venkitachalam, Director, Bizsolindia Financial Services Pvt. Ltd. (May 2020)

Global economic perspective

  • Coronavirus, a highly contagious respiratory virus; same family as the cold & SARS/MERS.
  • Over 27 Lakh cases worldwide; over 7 Lakh recovered & over 1.9 Lakh deaths; (as on 24th April 2020)
  • Majority of the world is under lockdown orders, shuttering the economy.
  • IMF estimates global GDP to fall by 3%, over 100 countries to officially slide into recession.

Globally, the Coronavirus has brought the economy to a standstill, with various countries’ growth trajectory now falling to negative levels.

Indian economy

  • In India, over 23,000 positive cases; 4,000 recovered & 788 deaths; (as on 24th April 2020)
  • IMF expecting GDP to drop to 1.9% in 2020;
  • India still one of the fastest growing major economy in 2020;
  • Bounce back expected in 2021 up to 7.4%;
  • Economists certain of a recession, if not a depression in India;
  • Opportunities exist, but governmental lacuna & disorganised work culture could cause slippage.

India will also face this uncertainty and chaos amid the lockdown, where manufacturing & services have come to a halt. 2020 will see bare growth, with 2021 showing a resurgence.

Indian equity market

  • Nifty expected to swing within a 1000-point range;
  • Nifty to get resisted around 9326 levels and trade downward around 8900 levels;
  • Intensity of selling by FIIs has subsided after nearly $10 odd billion outflow;
  • Investor sentiment focused on further stimulus by the govt., fall in COVID-19 cases and expectations of smart money moving towards India post-MSCI;
  • All eyes on lockdown due to perceived reduction in earnings, potential supply disruptions;
  • Sell on rallies and be wary of long side bets due to loss of bullish momentum.

After a major fall, equities are expected to remain rangebound, awaiting news of some measures from the government towards the industry, especially for MSMEs.

Currency Outlook

USD/INR

Expectation: 78.50-79.00

Reasons:

  • Corona-led risk-aversion
  • Q4 results by companies
  • Fall in supply due to lockdown
  • Drastic fall in exports
  • Forward cancellations in Apr ’20
  • QE in US could ease pressure

After a correction in the markets, USD/INR is expected to fall to 78 levels & above due to COVID-related uncertainties. 

EUR/INR

Expectation: 80.50-82.00

Reasons:

  • Reeling under Coronavirus
  • indecision in assistance
  • USD safe-haven during N. Korea news
  • Data below expectation
  • Move on fiscal stimulus not clear

The Eurozone is expected to remain under stress due to the intensity of the pandemic on the continent and consequently the EUR/INR is expected to remain weak in the days to come.

GBP/INR

Expectation: 92.00-93.00

Reasons:

  • High numbers falling to COVID-19
  • Insufficient measures by the govt.
  • Further uncertainty on Brexit talks
  • Fear overtaking positive data
  • GBP recovery after British PM out of ICU

The GBP is expected to remain weak due to the high number of deaths & positive cases of the virus in the country amid fears that the government has delayed responses to the pandemic.

RBI Announcements

First Salvo:

  • Payment re-scheduling: Term Loan & Working Capital
  • Additional working capital financing
  • Repo rate cut from 5.15% to 4.4%
  • Reverse repo rate cut from 4.9% to 4%
  • CRR cut from 4% to 3%
  • MSF Cut from 3% to 2%
  • Capital Conservation ratio last unit deferred
  • TLTRO 1.0 for liquidity infusion
  • Net Stable Funding Ratio deferred by 6 months

Second Salvo:

  • Reverse Repo Rate Cut from 4% to 3.75%
  • INR 50,000 Cr to NABARD, SIDBI & NHB
  • INR 50,000 Cr TLTRO 2.0 for NBFCs & MFIs
  • Increase in WMA
  • Restriction on Dividend payout
  • Reduction in Liquidity Coverage Ratio
  • Relaxation by NBFC for Real Estate
  • Extension of timeline for Insolvency Resolution
  • Changes in NPA Classification

The RBI has, twice in the recent past, announced guidelines for banks & financial institutions to increase liquidity into the markets to assist corporates, NBFCs & individuals with their debt burden, to varying levels of effectiveness.

Probable benefits for MSMEs

  • Waiver of charges on utility bills
  • Extension of moratorium by 6 months – with no extra implications;
  • Inclusion of more items into essential goods category;
  • Liberal enhancement of working capital limits;
  • Support in salary payments through ESI/PF reserves;
  • Wage subsidy as input tax credit;
  • Option to defer tax payments by six months;
  • Release of outstanding payments by govt. bodies;
  • Extend permission for delayed GST payments, without interest, late fees or penalties for all statutory payments.

The government has not, as yet, announced any major benefits for the MSME sector in particular, which is reeling the most under the lockdown. The measures mentioned above would go a long way to reduce the burden on the heads of MSMEs.

Reasons for currency volatility

  • Disruptions by COVID-19 will see USD preferred as safe-haven
  • Falling crude oil prices as importers rush to shore reserves at lower prices;
  • US Fed’s liquidity injections by swaps of $378 bn;
  • Major central banks’ stimulus packages to pump liquidity into markets;
  • FII outflows & inflows;
  • Crucial economic data across the world;
  • Continued RBI intervention;
  • Major Government announcements such as Investment policies, Immigration policies and extensions of lockdowns.

Exchange rates remained volatile through the month due to various macro & micro factors, especially on the back of the COVID-19 pandemic.

Strategies for saving through foreign exchange

  • Margin at the time of conversion;
  • Following the direction of markets for conversion;
  • Hedging through Forward Booking to stabilize costs/receivables

Corporates have a number of means of reducing their costs for imports & exports through the strategies discussed above.

Option for Financing

Short-term

  • Packing Credit (FC/INR) for exporters;
  • Short term Foreign Currency Term Loan (FCTL);
  • Working Capital Demand Loan (WCDL);
  • Letter of Credit backed funding (Supplier’s Credit) for importers
  • Option of last resort – Cash Credit

Long-term

  • INR Term Loans;
  • Long-term FCTL;
  • External Commercial Borrowing (ECB);
  • Debt financing (Bonds);

Equity financing (Shares).

Both short-term & long-term options for financing for corporates are available for various purposes & the same was discussed in detail.

Corporate Debt Restructuring

  • IBA in process of finalising norms for restructuring due to COVID-19 stress;
  • Main concepts of proposal include
  • Extension in tenure;
  • Increase in moratorium period;
  • Working Capital interest repayment over 12-24 months;
  • Not to be classified as NPA;
  • Continue as ‘Standard’ asset in bank books;
  • Proposal shared with RBI for final approval.

A fresh proposal for debt-restructuring for corporates was proposed by the Indian Bankers’ Association to the RBI to better move forward for the same to be implemented at the earliest.

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