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Manage exchange rate risks to cut losses, not to make profits, Tarapore tells corporates

Former deputy governor of the Reserve Bank of India S S Tarapore today emphasised that corporates should pursue a cautious and conservative strategy in managing exchange rate risks.

Speaking at the third annual chief financial officers' round table session in Panaji, Goa, today, Tarapore urged corporates to concentrate on generating profits rather than treating exchange rate management as a profit centre.

''Corporates would be well-advised to follow a loss minimisation strategy while dealing with exchange rate risks,'' he noted, adding that they should cover risks in both spot and forwards.

On the forward market, he said that this section of the interbank forex market should be viewed as an insurance agency, which provides cover against losses at a pre-determined cost.

He further said that the forward market, rather than draining forex reserves, enables market participants to get a fix on the local currency price on a particular transaction.

Tarapore said that corporates must realise that the ultimate inflation rate differentials determine the future course of exchange rate and a currency with a higher inflation rate cannot escape adjustment.

He felt that corporates should assess strategic, operational and information technology issues as they progressively adopt the euro.

''Despite the principle of no compulsion, no prohibition, many key European companies have already indicated that they would be adopting the euro as their preferred transaction currency. Hence, Indian traders would have to be prepared to deal in euro in the transition period,'' he said.

UNI

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