Jump in hedging costs raises dollar funding bill for India firms

By Anurag Joshi

Indian companies are paying the most since May to hedge dollar borrowings, adding to strains at firms already stretched by the pandemic.

The six-month Mifor swap rate, a derivative that firms use to hedge against moves in rates with foreign-currency borrowings, has climbed 8 basis points this month to 4.6 per cent. That’s near a seven-month high.

The jump in hedging costs is disrupting some firms’ plans to raise funds overseas, said Prabal Banerjee, group finance director at conglomerate Bajaj Group. Indian companies that borrow in overseas markets are already struggling due to weaker earnings because of the pandemic. A decline in the rupee against the dollar this year has also pushed up their foreign debt-servicing costs.

The rupee has weakened the most of any major Asian currency against the dollar so far in 2020, losing about 2.9 per cent, despite some recent gains.

Some market watchers attribute the recent jump in hedging costs to suspected intervention in currency markets by the Reserve Bank of India.

The central bank bought about $58 billion of dollars from January to September, a record for that period, according to the most recent offical data from the RBI.

While the central bank hasn’t yet released data for such purchases in later months, it may have bought in excess of $25 billion of the U.S. currency from October to late November, according to estimates by Abhishek Gupta, India economist at Bloomberg.