The US Federal Reserve’s first rate hike in three years could change the borrowing calculus for Indian companies, prompting them to increasingly weigh domestic funding against external commercial borrowings (ECBs) as overseas borrowing costs rise.
The Fed raised its target rate by 25 basis points to 3.75-4% and signalled that inflation remains elevated. US Treasury yields edged higher after the announcement, with markets factoring in further rate increases and the possibility of rates remaining “higher for longer”.
Industry experts said abundant liquidity in the Indian banking system could make domestic borrowing relatively more attractive for companies, particularly if the Fed tightens more aggressively than the Reserve Bank of India.
“Higher global interest rates and yields are likely to raise ECB costs. In part, the swap window by the RBI open until December-end could offer some relief,” said Sakshi Gupta, principal economist at HDFC Bank.
She added that much, however, will depend on the extent of rate increases in India and the US, as well as the trajectory of the rupee.
Sachin Sachdeva of ICRA said abundant banking-system liquidity could make domestic borrowing relatively more attractive for corporates compared with overseas funding.
Domestic borrowing costs, however, are also moving higher. The yield on 10-year AAA corporate bonds rose five basis points to 7.85% on Thursday, its highest since May 26.
Refinancing costs could also remain elevated as higher US sovereign yields feed into corporate borrowing costs, even as corporate spreads have narrowed, said Nitesh Jain, chief rating officer at CareEdge Global IFSC.
ECB issuances could moderate in the near term, although the RBI’s concessional swap window, available until December-end, should provide some cushion. “If you look at 3-5 years tenor by large corporates, then you can safely assume that the interest rate would rise in the range of 20-50 basis points per annum,” he said.
The Fed’s move comes amid strong appetite among Indian companies for overseas funding. According to RBI data, companies filed proposals to raise $7.7 billion through ECBs in July, up from $6.1 billion in June and the highest in 16 months.
At the same time, conditions in the domestic funding market have turned more favourable following a sharp increase in banking-system liquidity after the RBI’s recent foreign exchange swap operations, including its $136.4-billion FCNR(B) swap window.
With banks flush with funds, credit deployment is likely to become a priority, potentially intensifying competition for large corporate borrowers. This could give companies more attractive domestic funding options even as the cost of ECBs rises.
Source: The Financial Express
