India Inc borrows less via ECBs due to volatile rupee

Arbitrage between rupee-dollar borrowings disappearing, say experts

India Inc’s borrowing by way of External Commercial Borrowings (ECBs) has taken a hit in recent times due to volatility in the rupee on account of global factors. Experts believe these loans may not see pickup even in the next few months due to looming concerns of US Fed’s rate hike.

Data from the Reserve bank of India (RBI) shows that ECBs recorded a drop of 32.48 per cent year-on-year (y-o-y) in July 2015 to $2,143 million. On a month-on-month basis too ECBs recorded a fall of 32.16 per cent.

“ECBs had slowed down due to global volatility as a result of which spreads (the difference between the rate at which the ECB loans are given and US treasury yields of similar maturity) had widened. Even in August, ECBs were slow,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

The volatility in the global market was due to factors like the Greek debt crisis, fears of US Fed’s rate hike and the recent decision of China to devalue the yuan. All these factors had an impact on the rupee against the dollar in the past and even going forward the movement of the rupee will depend on global events that will pan out.

“ECB borrowings were down probably because the arbitrage between rupee borrowing and dollar borrowing is disappearing. The hedging costs are higher and in this arbitrage calculation, the hedging cost is taken into account. There was a lot of volatility in the rupee in July due to global factors,” said R Shankar Raman, chief financial officer and member of the board at Larsen & Toubro.

Earlier even those corporates who did not have a natural hedge used to go out and borrow through ECBs. But when the cost of ECBs became expensive due to rupee depreciation, they did not know how to repay the loan.

“Today particularly, those companies that do not have a natural hedge have become skeptical to borrow through ECB. Besides that there has also been a drop in the credit quality of Indian companies across the spectrum as a result of which overseas lenders are also skeptical to lend. This is the case with even other emerging market countries and not just India. The dollar liquidity has become very limited to emerging market economies, including India. ECB loans may go down further in the next few months,” said Prabal Banerjee, president (finance & strategy), Bajaj Group.

On Monday, the rupee ended weak at 66.48 compared with previous close of 66.16 per dollar. In August, the rupee weakened by 3.6 per cent and since the start of 2015, the rupee depreciated by 5.5 per cent.

RIDING OUT THE VOLATILITY

• Data from the Reserve bank of India (RBI) shows that ECBs recorded a drop of 32.48 per cent year-on-year (y-o-y) in July 2015 to $2,143 million. On a month-on-month basis too ECBs recorded a fall of 32.16 per cent
   
• The volatility in the global market was due to factors like the Greek debt crisis, fears of US Fed’s rate hike and the recent decision of China to devalue the yuan