Currency hedging strategies are essential for foreign investors holding industrial land over the long term in countries like India, where foreign exchange (FX) fluctuations can significantly affect repatriated returns. Because industrial land assets generate income in local currency (e.g., INR) and foreign investors calculate performance in hard currency (e.g., USD, EUR), managing FX risk is crucial for preserving net yields and exit value. Below are five key strategies used to mitigate long-term currency risk:
1. Forward Contracts
- Agreements to lock in a future exchange rate for converting INR into a foreign currency at a specific date.
- Ideal for predictable cash flows such as lease payments or planned repatriation.
- Helps eliminate uncertainty around expected returns over a 1–3 year horizon.
- Must be rolled over for longer exposures, with cost considerations for each renewal.
- Accessible through authorized dealer banks under FEMA guidelines.
2. Options and Option Structures
- Provides the right but not the obligation to exchange currency at a predetermined rate.
- Common types include plain vanilla options, collars, or participating forwards.
- Allows investors to benefit from favorable currency movements while protecting against downside.
- More expensive than forwards but offer strategic flexibility for uncertain timing of exits or variable income.
- Useful for protecting lump-sum capital repatriation events, such as land sale proceeds.
3. Natural Hedging via Revenue and Expense Matching
- Involves structuring local operating expenses or liabilities (e.g., construction, debt servicing) in INR.
- Ensures INR cash inflows (like lease income) are absorbed locally, reducing repatriation volume.
- Also used by foreign-invested SPVs to pay local suppliers and taxes from local income, minimizing FX exposure.
- Most effective when the project has steady operational revenue or a long-term tenant.
- Avoids financial hedging costs while managing exposure organically.
4. Hedging via ECB or INR-Denominated Bonds
- When raising debt (e.g., External Commercial Borrowings), investors can choose:
- Foreign-currency loans with built-in hedging at a fixed cost
- INR-denominated “Masala Bonds” where currency risk is transferred to the bondholder
- Foreign-currency loans with built-in hedging at a fixed cost
- This strategy allows risk transfer and interest rate predictability.
- Suitable for SPVs that finance land-linked infrastructure with a defined repayment schedule.
5. Staggered Repatriation and Exit Planning
- Instead of full capital repatriation at once, returns can be:
- Phased over time to average out FX fluctuations (cost averaging)
- Timed based on currency strength forecasts or economic cycles
- Phased over time to average out FX fluctuations (cost averaging)
- Enables investors to optimize exchange rate windows while maintaining liquidity buffers.
- Often combined with partial reinvestment in compliant onshore instruments to defer exposure.
