Most borrowers haven’t hedged external borrowings: analyst

Most borrowers haven’t hedged external borrowings: analyst

New Delhi: Many Indian companies that have gone in for foreign currency loans believe the rupee will appreciate further against the dollar and have not hedged against the opposite, according to the treasury head of a domestic financial institution. That is especially true of companies that raised less than $10 million (Rs40.6 crore) in overseas loans, adds the treasury head, who did not wish to be identified.

This is despite steps taken by the finance ministry to slow down foreign currency inflows and curb the appreciation of the rupee. The finance ministry on Tuesday issued new, more stringent norms on external commercial borrowings (ECBs).

A Mint analysis of the Reserve Bank of India data on external commercial borrowing inflows found that almost two-thirds of 189 ECB approvals for rupee expenditure in 2006-07 were for amounts less than $10 million. Total net ECB approvals in the year aggregated a record $16.1 billion.

ECBs for rupee expenditure, or borrowing abroad to spend on buying capital goods or for projects in India, surged with Indian companies getting approvals for $6.2 billion between April 2006 and March 2007.

Of this, companies obtained approvals for $3.2 billion between January and March on the back of a strengthening rupee that has appreciated by 9.2% since end 2006. Approvals in March alone accounted for $1.5 billion.

Analysts believe that failure to hedge such large exposures could be risky.

“The problem isn’t access to instruments. The problem is that people choose to remain unhedged. They choose to make a one-way bet on the rupee," said Ajay Shah, an independent consultant and former adviser to the finance ministry.

Shah said that the currency forwards market in India sees transactions worth an estimated $2 billion a day. Indian companies are not allowed to hedge their dollar borrowings in overseas markets.

The finance ministry says a significant part of ECB inflows in the recent past were used for domestic treasury operations as the cost of borrowing within India was higher.

Over the past couple of years, the average spread Indian companies pay in international markets for five-year debt has narrowed from 100 basis points over the London interbank offered rate (an interest rate standard with a prevailing rate of 5.22%) to about 50-60 basis points over it, said Anil Ladha, senior vice-president, debt capital markets, ICICI Securities Ltd.

Companies generally pay about 6% interest for five-year borrowings, Ladha had said in May, when the finance ministry began to first choke ECB inflows by disallowing realty companies from borrowing overseas.

A day after the finance ministry curbed ECB inflows to ease the pressure on the appreciating rupee, sentiment continued to be bullish, with the rupee falling a mere 0.2% to 40.52 to the dollar at close of trading Wednesday.

“Even today, the sentiment was that the rupee would appreciate; they (forex market participants) are comfortable taking this view," said V. Ravikumar, senior director, treasury, IDFC Ltd.

According to Ravikumar, the signals on interest rates in India and the US are the main reasons for the market remaining bullish. The 31 July RBI policy statement increased cash reserve ratio (CRR) of banks, the amount set aside by commercial banks with the central bank for every rupee in deposits, by 50 basis points to 7% to suck out liquidity. This could put upward pressure on interest rates in india.

This week, the US Federal Reserve took measures which are likely to lower interest rates in that country and also lead to a weaker dollar. The combined effect of these measures have resulted in currency traders retaining a positive outlook on the rupee.