The surge in US interest rates last week should serve as a warning signal for those Indian companies that want to borrow abroad to finance their overseas acquisitions. There are clear signs now that inflationary pressures are increasing in many countries, which will force their central banks to hike key interest rates. The bond markets are anticipating these hikes.
IMF chief Rodrigo Rato has already given out a fairly blunt warning. He said the merger mania that has rippled around the world in recent years could be a “show of complacency”. Rato is particularly worried about mergers fuelled by lots of cheap debt.
Many Indian companies have been playing the overseas leveraged buyout (LBO) game. By itself, the attempt to leapfrog into the big league by buying overseas competitors is not a bad idea. The challenge is to see that interest costs do not spring any nasty surprises. Taking on global debt will now be more risky.