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Foreign exchange risk management tips for Indian SMBs

Friday March 17, 2017,

5 min Read

Once sporadically meeting demands of the national market, today, Indian MSMEs have become dominant players in the country’s business landscape. However, the MSME sector is still experiencing a rapid growth phase and has only begun unveiling its true potential. The share of MSME products in the Indian export has been constantly escalating with 42.42% during FY 2013-14, 44.76% during FY 2014-15, growing to 49.86% during FY 2015-16. Nevertheless, MSMEs’ increasing dominance in international trade has also brought them under the impact of fluctuating currency rates – something which can have drastic results on the company’s bookkeeping and accounting. To prevent losses, it has become compulsory for MSMEs to increase their understanding of foreign exchange and adopt the most efficient forex trading mechanisms.

Challenges faced by SMEs

The constantly fluctuating currency has been a great deterrent for MSME businesses in addressing a more promising global market. As these businesses often have a low understanding of foreign exchange, even the operational businesses are susceptible to ill-timed transactions causing negative or less desirable results. In an urgent transfer, it is also possible that the business might not be availing the best rate available in the area. On the other hand, currency exchanges at banks and traditional money changers involve additional costs since they charge a high margin which cumulatively increases the overall cost.

Also, unlike multinational corporations, foreign trips of MSME professionals are financially constrained considering the size of their business units. Airport exchange counters across the globe can even charge a traveller up to 10% or more than the standard cost. Apart from a seemingly unpredictable forex market, these issues pose as a great challenge to MSME businesses.

Factors affecting currency rates:

Currency fluctuation is a common phenomenon amongst countries that have floating exchange rates in place. A favourable macroeconomic environment is the result of factors which directly increase the demand for a currency. They include competitive advantages possessed by a country as well as specific government policies. International trade, Consumer Price Indices, Producer Price Indices, productivity, Gross Domestic Product, and overall industrial production must also be taken into account for the relevant estimations. Current Account deficit, the balance of trade between a country and its trading partner, is also a decisive element in the exchange rate. A country whose import exceeds its exports is exposed to excess demand for foreign currency. This lowers the country’s exchange rate.

Another such factor is the interest rate. Interest rate is the amount at which capital is borrowed within a nation. Higher interest rate results in greater capital returns and is attractive for foreign investors, whereas, lower interest reduces the currency’s relative value. Stock markets and political factors also affect the currency exchange rate of a country. Lucrative stock indices increase the demand for a currency and result in an increase in its exchange rate. To the contrary, a depreciating stock with foreign investment results in the currency outflow to a more promising market. Also, political instability directly results in capital outflow from the country which bears a brunt on its currency exchange rate. The prevalent Law of One Price, which prevents arbitrage amongst international markets, also adjusts price of goods or exchange rates to ensure price parity amongst markets.

Cumulatively, there are multiple interrelated and dynamic elements that need to be analysed in order to understand the best time to execute transactions. In addition, as they are subject to real-time variables including government’s manipulation and financial market developments, it is important to keep a constant eye on all the relevant parameters.

Technologically-driven platforms to facilitate better decision for currency exchange for SMBs:

Addressing aforementioned challenges faced by MSME businesses, new-age platforms are coming into the picture with their technologically-driven models. They are often headed by a team of forex veterans and technological experts who have intense knowledge and experience pertaining to foreign exchange dynamics. These platforms not only offer discounted rates but also provide an unmatched transparency in an otherwise opaque and fragmented currency exchange market. They connect the customers with the most ideal vendor with ‘same day delivery’ at their doorstep. Such platforms often operate on a model similar to ‘stock markets’ where money changers compete to provide minimum rate to its customers. Instead of unreasonable rates offered by banks and traditional vendors, the model facilitates utmost transparency in the foreign exchange. Offering unmatched flexibility to businesses, they also provide rate alerts as per the business’ expectations, lock-in option for the current rate, best-value products and services, and update exchange rates in real-time within a margin of 3 seconds.

The emergence of such platforms has opened new opportunities for MSME businesses in India. They are simplifying forex through the aegis of technology and becoming a driving force in bringing more MSME businesses into international trade. In order to navigate the complex web of orex transactions, therefore, Indian MSMEs would do good to rely on these tech platforms and significantly boost their earnings through international trade. 

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