Tata Steel Said to Hedge Risks to World Beating Rupee

Tata Steel Ltd. is increasing its foreign-exchange hedging to cover almost all its commodity imports for the next three months to protect against rupee swings on concern elections this month won’t deliver a clear winner, people with direct knowledge of the matter said.

The overseas purchases to be covered by the contracts include coking coal that makes up as much as 80 percent of the Mumbai-based company’s $1 billion in annual inbound shipments, two people said, asking not to be identified because the information is private.

India’s biggest maker of the alloy is concerned that the elections ending in mid-May may produce a government without a clear mandate and reverse the best rally among the world’s largest economies, boosting import prices, they said. In the 2009 polls, the rupee jumped 6.4 percent in the month the results were declared.

“People are aware of the potential volatility that could come from the election results,” Hamish Pepper, a foreign-exchange strategist at Barclays Plc in Singapore, said in a telephone interview. “There’s a market perception that a Bharatiya Janata Party win could be good for corporates and inflows, but the outcome is uncertain, and the final verdict will give direction to the currency.”

The main opposition BJP, led by Narendra Modi, is poised to win 209 of 543 seats up for grabs in the lower house of parliament, according to a March poll by ABP News television channel and Nielsen. The Congress party, in power for a decade, is headed for its worst-ever performance with 91 seats, the poll showed. Results will be announced on May 16.


The rupee has rebounded 15 percent from a record low reached on Aug. 28 and last traded at 59.89 a dollar on March 28 in Mumbai, according to data compiled by Bloomberg. Three-month implied volatility climbed 92 basis points in March, the most this year, to 11.39 percent.

Tata Steel spokesman Kulvin Suri didn’t respond to three e-mails seeking comment on the company’s hedging plans. The two people familiar with the matter declined to specify at what level the company is hedging.

Tata Steel hedged about 60 percent of its purchases a year ago, one of the people said.

Hedging Costs

The cost of hedging foreign-exchange risk is increasing as options traders get more bearish on India’s currency. The price of contracts that fix the conversion rate for buying dollars with rupees in a month’s time has jumped 123 basis points to an annualized 9.25 percent over the spot rate from a five-month low in January, according to data compiled by Bloomberg.

One-month contracts offering the right to sell the rupee cost 81 basis points more than those to buy, the data show. The rate has doubled from a seven-month low touched in March. The so-called risk-reversal rate is still lower than last year’s peak of 5.5 percent.

Investor expectations a Modi-led government with a strong mandate may revive stalled infrastructure projects and reverse the slowest growth in almost a decade helped lift the S&P BSE Sensex Index to a record in late March and the rupee to an eight-month high against the dollar.

In the 2004 general election, the Congress party unexpectedly won, triggering a slide that pushed the rupee toward its low for the year.

Biggest Risk

Tata Steel is seeking to protect itself from a surge in volatility such as the one in August when the three-month implied gauge of swings jumped to a five-year high after the current-account deficit widened to a record.

The biggest risk to the rupee’s rally would be a weak and indecisive coalition after the elections, Barclays’s Pepper said.

Tata Steel shares rose 1.8 percent to 401.15 rupees in Mumbai, the highest closing level since Jan. 6. The stock has gained 27 percent in the past year versus the 19 percent advance in the benchmark Sensex.

Societe Generale SA recommends that investors protect themselves from election-outcome risks by purchasing two-month options to buy the dollar and sell the rupee.

While markets are factoring in a “positive outcome” there’s a risk the polls won’t throw up a clear winner, Amit Agrawal, a strategist at Societe Generale in Bengaluru, the southern Indian city formerly known as Bangalore, wrote in a March 24 note to clients.

Before it's here, it's on the Bloomberg Terminal.