With falling rupee, rising interest costs ring alarm bells for India Inc

Many large companies and public sector banks and financial institutions are tapping the international markets to take advantage of the cheaper funds

The chief financial officers of India Inc are worried that the continuous fall in the rupee against the dollar might stoke inflation, which would nudge the Reserve Bank of India (RBI) to increase interest rates -- increasing the cost of funds for corporates.     

"In the past, the RBI has raised interest rates to check volatility. The sudden fall in the rupee's value is alarming and the RBI will not hesitate to raise rates so as to stop the fall in the Indian currency's value," said Prabal Banerjee, president of Bajaj group. "The cost of funds for corporates in the financial year ending March next year will go up substantially as interest rates are going up," he added. To stem the fall in their currency's value, central banks across the world are raising interest rates -- triggered by rising US interest rates and a rising dollar. 

According to statistics collated by Business Standard, India's top 50 listed companies in the NSE's Nifty index paid Rs 778 billion in interest cost alone in the year ending March 2018, which was higher by 16.2 per cent when compared to the financial year 2017. In FY17, the Nifty companies paid Rs 670 billion in interest cost. The rising cost of funds dents into corporate profits, which, in turn, negatively impacts investments.  

While the sudden fall in the rupee's value is bad news for oil importing companies, the exporters would be earning more from their dollar earnings in the coming months. The rupee is down by nine per cent versus the dollar since January this year -- giving extra earnings to exporters from India.

Many large companies like Reliance Industries, Bharti Airtel, Tata Sons, Birla Carbon and public sector banks and financial institutions are tapping the international markets to take advantage of the cheaper funds. "It makes sense to raise funds abroad as the cost of funds is lower by 3-4 per cent when compared to local rates. Besides, when a company has to refinance its foreign loans, it makes sense to raise funds abroad," said the CFO of a large corporate, asking not to be quoted.

On August 1, the RBI raised rates by 25 basis points fearing that inflation might go up again. Besides, the RBI said in case there was fiscal slippage at the Centre and/or state levels, it could have adverse implications for market volatility, crowd out private investment and impact the outlook for inflation.