Fitch warns unhedged FX risk may pressure Indian corporate ratings

Fitch Ratings has warned that Indian corporates failing to hedge foreign-exchange exposure face downward pressure on their credit ratings, especially those in renewables, power, and toll roads vulnerable to significant rupee depreciation.

Global credit rating agency Fitch Ratings on Thursday flagged that failure to sufficiently hedge foreign-exchange (FX) exposure could exert pressure on credit ratings for certain Indian corporates, particularly those with significant vulnerability to rupee depreciation. The report noted "In sectors with significant vulnerability to rupee depreciation, we anticipate that a hypothetical failure by issuers to substantially mitigate foreign-exchange (FX) risks through hedging could put downward pressure on ratings."

Sectors Exposed to FX Risk

In a press commentary, Fitch said that while the majority of Indian companies in its rated portfolio either have natural hedges through local currency revenues or have adopted robust hedging practices for foreign currency obligations, sectors such as renewables, power utilities and toll roads remain more exposed to FX risk due to limited natural hedges. Fitch noted that many issuers in these segments have hedged their foreign-currency debt, keeping forex exposure relatively contained. However, where hedging is only partial, particularly on principal repayments, significant rupee depreciation could elevate hedging costs and weaken debt and interest coverage metrics, potentially leading to downward rating pressure.

Impact of Sharp Rupee Depreciation

The rating agency underscored that a sharp depreciation of the rupee exceeding 10 percent against the US dollar over the next 6-12 months could materially increase FX hedging costs for vulnerable companies. It stated that even under such a scenario, continued hedging would be expected, but any failure to mitigate FX risk could negatively affect credit profiles. "We believe companies with FX vulnerabilities would continue to substantially hedge US dollar exposures under such a scenario, but any failure to do so could put downward pressure on ratings" noted Fitch Ratings

Companies with Natural Hedges

Fitch further highlighted that many other Indian corporates, including those in building materials, technology, pharmaceuticals and automotive sectors, benefit from export earnings or overseas operations that act as natural FX hedges, helping insulate them from adverse currency movements. (ANI)

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