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Volatile Rupee Adds To Corporate Treasury Dilemma: KPMG

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The depreciating (10 per cent in last month alone) and highly volatile Indian rupee is adding to corporate treasury dilemma and especially for companies dealing with commodities and IT/ITEs sectors, says a KPMG report.

According to a KPMG India survey titled 'Managing Currency And Commodity Risks' that was released on 3 July 2013, a stronger organisational risk culture and greater support from the management are perceived to be the major areas of improvement for better risk management.

The respondents to the survey comprised treasury heads and CFOs from companies across diverse sectors such as automobiles, chemicals, fertilisers, IT, healthcare, oil & gas and FMCG.

Companies do not want to lose out to competition in future because their portfolios are aggressively hedged nor do they want to miss out on the current opportunity of locking in profits on their exposures, the report said, adding this is particularly true of companies dealing with commodities and those in the IT/ITEs sectors.

"Active management of the risk of fluctuations in the currency market is no longer an option, it is a necessity and vital to maintaining business profitability," Kuntal Sur, Director, Financial Risk Management, KPMG in India said.

Sur further added that the time has come to go beyond 'crystal ball' gazing, as the companies that relied on market expert views; left with red on their financial statements.

With currencies moving over 10 per cent in a month you do not need a crystal ball; you need an independent risk management process,

Around 87 per cent of the respondents said that a stronger organisational risk culture would help in improving risk management in the company. In addition, a need for better communication between the treasury and the business units was also felt by a majority of the respondents.

The survey further noted that while the urge to foresee the future and beat the market is high, more and more companies are realising that it is better to be prudent and hedge exposures in a structured manner, than to rely on market gurus and their ever changing forecasts.
 
Key Findings
  • Market views still a dominant factor in decision making: Bankers and 'market gurus' views on currency exchange rates are still the main influence on hedging decisions
  • Treasurer's dilemma: The pressures of being always on the right side of the market inhibit the desired approach to managing market risks
  • Risk appreciation: There has been improvement in understanding risk framework at operational level including treasurer, however the appreciation at board level may be further improved
  •  Increased role of risk management in corporate decision making: 88 per cent of the respondents reported an increased involvement of risk management in business decision making process
  • Need for a stronger risk culture: 87% of the respondents saying that a stronger organizational risk culture would help in improving risk management in the company
  • Risk management framework: A need for better communication between the treasury and the business units was also felt by a majority of the respondents

The survey also observes that while the urge to foresee the future and beat the market is high, more and more companies are realising that it is better to be prudent and hedge exposures in a structured manner, than to rely on market gurus and their ever changing forecasts. After the derivative crisis hit the Indian market there has been a sharp fall in the number of companies using derivatives to hedge their foreign currency risk. The board of directors at a very large number of companies has prohibited the use of any derivative instrument for hedging of exposures.