The hedging scenario in micro small and medium enterprises (MSMES) (With respect to the change in RBI guidelines as on 15 december 2011)

In the world of Globalization where more and more firms are entering the international markets, they are being continuously exposed to foreign exchange rate volatility. Consequently, they are getting more inclined towards financial derivatives for effective foreign exchange risk management. This study aims to analyse the management of the foreign exchange risk by the small and medium enterprises by availing the currency hedging strategies. As the currency derivatives market is still at a nascent stage in India, the use of hedging strategies is a new concept for the firms. Information has been obtained by conducting primary research on the SMEs to determine the usage of the currency hedging strategies and the impact of the latest RBI guidelines (as on December 11. 2011). It has been fount through the study that majority of the firms have been dealing in the foreign exchange market for more than 5 years with Forty percent of them having less than twenty five percent of the business outside India. The Sixty three percent of the SMEs have more than ten Forex transactions in a year. It is surprising that only 11 out of 50 SMEs hedge the Foreign Exchange risk through Currency Forward Contracts. The primary reasons for the low percentage of hedging is due to the lack of awareness about existence the hedging tools, the conservative approach of the SMEs and the uncertainty of currency market.