MUMBAI: The slide of the rupee to record lows could tear up balance sheets of many corporates that have borrowed overseas in the last few years, nullifying the cost advantage they enjoyed earlier.
The cost of repayment of overseas loans and bonds, estimated at more than $100 billion in the next few years, may climb substantially, with the rupee depreciating nearly 12% since its peak this year. A fall in the rupee’s value forces the borrower to part with more of the Indian currency to pay up the same amount of US dollars.
While the number of companies accessing overseas loans has fallen since January, even if corporates want to raise funds abroad, they may have to settle for higher yields. “If the rupee does not stabilise soon, corporates would be affected,” said Ajay Marwaha, head of trading at HDFC Bank. “We need to find sources of inflows. The RBI has done everything. Now, the government needs to make some structural changes.”
The rupee has depreciated 6.3% this quarter and is 11.9% down from its February peak as overseas fund flows tapered off while import demand remained stubborn.
The widening current account deficit – the excess of imports over exports – is adding to pressure on the currency as the government remains indecisive on doing away with, or even reducing, subsidies on petroleum products.Indiaimports three-fourths of its oil requirements.
The rupee ended at 54.48 to the US dollar on Thursday, off an all-time low of 54.58.
When interest rates were benign and the currency stable, companies such as Bharat Forge, Rural Electrification Corp, Bharti Airtel and Adani Power borrowed overseas for expansion.
There was a cost advantage for companies since funds were available for at least 2-3 percentage points lower than domestic rates as the European Central Bank and Federal Reserve were keeping interest rates at a record low when the RBI was raising rates to fight inflation.
But the tables have turned since then as exports did not climb fast enough to feed the growing import demand. The external deficit is at about 4% of the gross domestic product, which is pushing the rupee’s value lower. Sterling Biotech, a gelatine stick maker, failed to pay $184 million of convertible bonds that matured this week.
“In the last three months, the cost of borrowing of corporates has increased 10%,” said Parthasarthy Mukherjee, head of treasury and international banking at Axis Bank. “The rupee devaluation is affecting everybody and companies have adopted a wait-and-watch approach.”
The average yield on Indian companies’ US dollar bonds has risen 507 basis points over Treasuries, from 476 basis points at the end of March. The yield on ICICI Bank’s eight-year dollar debt was 6.09%, 153 basis points more than similar-maturity notes of Bank of China, near the widest gap in four months, Bloomberg data shows. A basis point is 0.01 percentage point.
“Depreciating rupee may affect those corporates that have not hedged their borrowings,” saidManmohan Singh,MD& head of debt capital market at Royal Bank ofScotland.
“These corporates had borrowed when the rupee was trading at 45 to the dollar. They would be foolish to keep open positions.” Corporates normally do not reveal at what rate they had hedged their positions, or how much of the total exposure they had hedged. The volatility in the last one year had also left many corporates wondering what kind of hedging strategy to use.
The rupee was the worst performer in the December quarter inAsia, but turned the best in the first quarter after the RBI curbed speculation. Within two months, it has reversed the trend to depreciate again, making it difficult to hedge.