ECB attraction unlikely to wane for firms

With high lending rates at home, such borrowing rose 33% in October over a year before

Lower interest rates in the global market have led to Indian companies resorting to external commercial borrowing (ECB) rather than loans from banks. This is because in the absence of a rate cut by the Reserve Bank of India (RBI), the baserate at which banks lend to them continues to be high.

In October, companies raised $2,565 million, growth of 33.4% over a year before. However, on a monthly basis in October, ECB dropped 19.3%. Bank credit for the fortnight ended October 31 was 11.17% higher over a year before.

"Interest rates are expected to move up in the US. Therefore, this probably would be the time when good-rated corporates would access the global markets for cheaper international borrowing. Interest rates there are poised to go up," said Shubhada Rao, senior president and chief economist, YES Bank.

Last month, the US Federal Reserve ended its bond-buying stimulus programme, throwing the debate forward to when it would raise benchmark borrowing costs from near zero, where they have been pinned since late-2008. The minutes of its meeting in October said a number of officials felt it would be wise to provide some clarity soon on how swiftly rates might rise.

"Given the relative stability of the rupee in the past few months and the high headline rates in India, it does appear that some people prefer to borrow in dollars on an unhedged basis. Some of them would have natural hedges and some might not," said Ananth Narayan, regional head-financial markets, South Asia, Standard Chartered Bank.

Earlier this month, RBI deputy governor H R Khan warned against too much complacency due to stability of the rupee against the dollar. "People are now so comfortable with the rupee that there are issues of hedging. Too much of complacency is happening due to the stability syndrome," he said.

In an earlier speech in October, Khan said the hedge ratio for ECB to foreign currency convertible bonds declined sharply from about 34% in 2013-14 to 24% during April-August this year, with a very low one of about 15% in July-August.

Experts believe the vulnerability of India as a whole increases if there is too much of a pile-up of dollar borrowing and exposures in the dollar.

The repo rate, at which banks borrow from the central bank, was increased by 25 basis points in January and has since remained at 8%. As most experts believe RBI might not change the rate in the monetary policy review of December 2, the lending rates of banks might continue to be high for some more time, resulting in companies tapping the international markets for fund raising.