Indian rupee’s plunge costs unhedged funds dearly

Indian companies will need to repay about $10 billion of foreign-currency bonds and loans by 31 March, 93 % of that in US dollars


Photo: Mint
Photo: Mint

Mumbai: The rupee’s 2.4% plunge in a single month meant an anxious November for treasurers at Indian companies that haven’t hedged their overseas debts.

Indian companies will need to repay about $10 billion of foreign-currency bonds and loans by 31 March, 93 % of that in US dollars, data compiled by Bloomberg show. About $3 billion of debt from borrowers including HDFC Bank Ltd, ICICI Bank Ltd and refiner Indian Oil Corp. are due by 31 December.

“In my reckoning, about 40 to 45% of foreign-currency exposures from India are still unhedged,” said Prabal Banerjee, chief financial officer at conglomerate Bajaj Group, adding that he has hedges in place. “This will be a pain point for all companies who have not taken a long-term strategic view of covering their entire forex exposure.”

The rupee plunged to an all-time low of 68.8650 per dollar on 24 November, while a measure of expectations for volatility in the coming month climbed 167 basis points in November to 6.21%, the most since August 2015.

Until recently, Indian companies had been borrowing to take advantage of their cheapest overseas spreads in almost a decade, amid rising confidence in the world’s fastest-growing major economy. While multinational businesses have natural hedges against rupee swings, those focused on domestic markets may now prefer local financing.

“The decline will definitely have an impact on our profitability because we have a significant foreign-exchange exposure,” said Arun Kumar Sharma, finance director at Indian Oil Corp., which has $750 million of dollar loans due this month.

Companies with maturing debt will have to pay an additional 3% to 4% due to the rupee’s depreciation, said P. Balasubramanian, director for finance at Bharat Petroleum Corp. The company has a $300 million loan due in May 2017, Bloomberg-compiled data show.

ONGC Videsh Ltd, the overseas unit of Oil & Natural Gas Corp. needs to service a $1.16 billion bridge loan due in February, according to Bloomberg-compiled data. While A.K. Srinivasan, director for finance at ONGC, declined to comment on his company’s own positioning, he said a lack of hedging will impact borrowers in general, as the rupee may reach 70 per dollar, Srinivasan said.

“For ONGC this is positive, as oil prices are marked in dollars,” he said. “For every one rupee increase in the value of the dollar, the company gains about 6 billion rupees annually.”

Rural Electrification Corp., a New Delhi-based lender, said it is “always hedged on the principal” of its debt liabilities. The rupee’s fall will hurt companies that haven’t hedged obligations due this month, according to Ajeet Agarwal, finance director at Rural Electrification Corp. The company has to repay a 200 million Swiss franc ($197 million) bond in March, according to data compiled by Bloomberg.

“Currency risk is the main obstacle for overseas bonds and loans,” according to Rajesh Mokashi, managing director at CARE Ratings Ltd. “As there has been limited intervention from the RBI in the present phase of rupee depreciation, it is possible that it will settle at a higher rate of 69-70 to the dollar if unchecked. This will enhance the servicing costs.” Bloomberg

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