Rupee slide to spell trouble for weaker corporates repaying loan in dollars

As the Indian economy has liberalised, the effects of a weak rupee on the economy and industry have become more complex.


Earlier the main channel of effect was through trade: a falling rupee made exports cheaper and imports expensive. Exporters benefited as their goods became more competitive in the global market. Consumers (usually) became less well off, at least in the short run, as the price of imported goods rose. And to the extent that the government absorbed the impact of expensive fuel imports, government deficits rose.

But things are changing. For one, it’s not clear that exporters automatically benefit from a falling rupee. For a larger set of companies, which borrow abroad, a falling rupee means pain as interest payments, denominated in dollars, effectively rise for a company which does most of its business in India.

Over the course of 2013, India will pay back around $166 billion in debt to a range of ‘lenders’ — many of these are non-resident Indians, but anywhere between a fifth to a third of the debt will be loan and interest repayments on foreign currency borrowings by Indian companies. A weak rupee potentially raises the effective cost of repayment for those which do most of its business in rupees.

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But even as the rupee remains volatile, there are opportunities for companies to raise fresh funds overseas. “While the forex market has been volatile, the offshore loan and bond markets are flush with funds and are liquid. Corporates looking to raise fresh money or rollover existing loans should not face too much problem,” says Hitendra Dave, head of global markets at HSBC in India.

The RBI allows corporates to raise funds through foreign currency loans (external commercial borrowings, or ECBs) from overseas markets for specific purposes such as importing capital goods or funding projects. Under norms, corporates cannot borrow at a rate greater than 3.5-5 percentage points over dollar benchmark interest rates.

Because of the huge amount of quantitative easing undertaken by the US Federal Reserve in the past few years, effectively injecting funds into global money markets, dollar interest rates have fallen steeply and are now well below 1%. But added to the overall dollar interest costs, companies must account for the weakening of the rupee over the tenure of the loan. This could take the overall cost of the loan to about 8-8.5% depending on how credit-worthy the borrower is. That’s still lower than the cost of borrowing in rupees.

Even as international loan markets are stable, the joker in the pack is the rupee weakness. “The current environment, with respect to overseas borrowings by Indian corporates, is reasonably comfortable. However, if the dollar continues to remain strong, things could get more difficult,” says Ashish Vaidya, head of fixed income, currency and commodities trading at UBS. Even here there is less cause for concern.

“Given the volatility in the rupee over the past year, most corporates would have already hedged their forex exposure with respect to overseas borrowings,” says Vaidya. In layman’s terms, corporates would have insured themselves from any sharp swings in the exchange rate in the forex market. Says Dave: “The bulk of India’s ECBs currently outstanding were raised after 2008, and most of those loans would have already been hedged for foreign exchange risk.”