The rupee today gained some of its lost ground as stock markets recovered, but the weakness of the Indian currency is making many CFOs nervous.
If the rupee continues to depreciate against the dollar, many Indian companies which have availed foreign currency loans, will have to provide for mark-to-market (MTM) losses (writing down securities and reflect current value)on these loans in the June quarter and take a hit on their bottom line. There will be MTM losses as companies need to provide more rupees for every dollar. Most Indian companies didn’t take cover on such loans as the long-term view was that the rupee would appreciate against the dollar and they would gain in the process.
According to the Reserve Bank of India, Indian companies made external commercial borrowings (ECBs) of Rs 21,669 crore in foreign currency loans in 2009-10, Rs 18,363 crore in 2008-09, Rs 30,958 crore in 2007-08 and Rs 23,786 crore in 2006-07.
Many of these loans go back to 2006-07 and are due for conversion this year, in 2011 and 2012. According to Bloomberg, there are over 200 companies, which have issued foreign currency bonds that are due for conversion between 2010 and 2012.
These include companies like Tata Steel, Suzlon, Tata Motors, Mahindra & Mahindra, among others. The average rupee-dollar rate was Rs 43.99 during 2006-07, Rs 41.59 in 2007-08, Rs 45.34 in 2008-09, and Rs 47.61 in 2009-10.
‘‘Companies borrow abroad to save on interest costs. Unless they freeze the currency risk, the depreciation of the currency (rupee) could negate the savings in interest,’’ said a Mumbai-based foreign exchange consultant. That’s what has happened this time.
Many companies could have covered their loans when the rupee touched Rs 40 against the greenback and protected themselves but they left these loans uncovered, as they thought the rupee would appreciate further.
Companies often do an interest swap to lock in a lower interest rate, but they also need to take a principal-only swap, when the rupee rate is favourable, which would hedge their (loan) principal against currency fluctuation.
Meanwhile, exporters who had sold their receivables forward at Rs 44.80 to a dollar, would suffer a notional loss as they can’t take advantage of the rupee depreciation. But, if they have bought an option, instead of basic forward cover, they can exercise their right on the option and sell at existing rates.
