India’s currency market witnessed a massive spike in foreign exchange hedging activity by importers in March 2025, as a 2% rally in the Indian rupee prompted them to lock in favorable rates. According to data from Clearing Corporation of India Ltd (CCIL), the forward contract volume by importers hit a record $66.5 billion, marking a 75% year-on-year jump and the highest ever since data tracking began in July 2016.

This sharp surge in hedging activity was not without consequences. Several banks are now facing margin calls due to the notional losses on these positions, although these losses are technically borne by their clients.

What Drove the Surge in Hedging Activity

The Indian rupee, which had been under pressure earlier this year—hitting a record low of 87.95 per US dollar in mid-February—rebounded sharply in March. It was last quoted at 86.07, a notable recovery supported by:

• A decline in the US dollar index

• Increased foreign inflows

• Unwinding of bearish positions by investors

Importers, who had been caught off guard by the pace of the rupee’s earlier decline, were quick to hedge once the opportunity to lock in lower rates presented itself. As one FX salesperson put it, “They all jumped in when the opportunity came in March.”

This activity contrasts with exporters, whose forward contract bookings declined on a year-on-year basis, reflecting a clear divergence in sentiment and strategy between the two groups.

How FX Forward Contracts Work and Why Importers Rushed In

Forward contracts are agreements to buy or sell a currency at a predetermined rate at a future date. For importers, a stronger rupee means lower cost of buying dollars, which is essential for settling overseas purchases.

By entering into forward contracts, importers shield themselves from future currency depreciation, which could increase import costs. Given the rupee’s recent volatility, locking in favorable rates provided predictability and cost control.

However, these large volumes of forward contracts require banks to hedge themselves by entering offsetting deals with other banks—interbank transactions settled through CCIL.

Banks Now Grappling with Margin Calls

As the volume of forward contracts rose dramatically, so did the exposure of certain banks that predominantly service importer clients. These banks faced notional mark-to-market losses due to the rupee's strength and the terms of the forward contracts. This has resulted in:

• Clearing Corporation of India Ltd (CCIL) demanding additional margin deposits from the banks to cover potential exposure.

• Treasury heads at multiple banks confirmed the situation, with a senior official at a foreign bank stating: “We have had to post additional margin to CCIL, largely due to the activity of importers.”

• For larger banks, these margin calls are routine and manageable, but for smaller banks, the requirements may stretch liquidity management.

An FX salesperson from a major foreign bank also noted receiving a “minor” margin call, confirming the impact is widespread but varied based on client composition and contract size.

Outlook for Rupee and Currency Markets

While March's rally was welcomed by importers, the rupee’s outlook remains uncertain, influenced by factors such as:

• US interest rate policy

• Global geopolitical tensions

• Commodity price fluctuations

• India’s trade balance dynamics

Bankers have pointed out that March’s activity was driven by opportunity rather than a broader structural shift. They caution that if the rupee resumes its decline, there may be further volatility, potentially triggering additional hedging and margin adjustments.

Importers appear to have learned from the previous under-hedged period, where the currency quickly weakened without warning. This time, they reacted swiftly.

Exporter Hedging Slows Despite Rebound

On the flip side, exporters have pulled back from locking in forward contracts, likely due to:

• The rupee strengthening, reducing the incentive to hedge

• Concerns about missed upside potential if the rupee weakens again

• Possibly greater reliance on natural hedging strategies

This divergence in strategy between importers and exporters reflects their distinct risk exposures and market outlooks.

CCIL’s Role and Systemic Stability

The Clearing Corporation of India Ltd acts as the central counterparty for all interbank transactions. To maintain systemic stability, CCIL requires banks to post margins in line with their net open positions and market risk exposure.

Even though the losses are not real, and banks expect to recover them from their clients, CCIL enforces discipline by demanding these margins upfront, ensuring that any failure to meet obligations does not lead to wider market disruption.

CCIL has not commented officially on this issue, but insiders expect that margin levels may remain elevated if importers continue to dominate forward contract activity.

Lessons and Strategic Implications

There are key takeaways for both market participants and policymakers:

• Currency hedging is now a key strategic tool for Indian businesses, especially given the volatile global macro environment.

• Banks must manage client concentration risks carefully to avoid large margin calls.

• Importers should not delay hedging decisions and must remain agile in response to currency movements.

• Policy support may be needed to strengthen the forward market’s depth and liquidity.

The recent episode also underscores the need for more advanced risk management strategies and possibly the development of derivative products that allow for better customisation and flexibility in hedging.

Conclusion

India’s importers made a bold and strategic move in March 2025 by hedging at record levels, taking advantage of a brief but strong rally in the rupee. While this has placed short-term pressure on banks, particularly through margin calls from CCIL, it also reflects a maturing currency market where participants are becoming more proactive and sophisticated.

As the rupee’s journey continues to remain uncertain, businesses must remain alert, and the financial ecosystem must evolve to support their hedging needs efficiently. This episode is not just about one month’s data spike—it is a reflection of deeper shifts in how Indian corporates are managing currency risk in a globally interconnected market.

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