India Inc to pay more as Libor touches new peak

Indian companies will have to pay a higher interest rate on their existing foreign currency loans as the overnight London inter-bank offered rate (Libor) touched an all-time high of 6.88 per cent on Tuesday.

This is likely to push up the Libor on loans of three months and six months tenure.

“Most Indian companies have borrowed in floating Libor, which are reset in 3/6/12 months. If a company chooses to roll over a loan, it will have to pay a higher rate. Besides nobody has the money to repay. People won’t buy dollars at Rs 46 to a dollar to repay a loan,” said a CFO with a leading steel-maker.

Some others say the Libor has lost its relevance at least for a month now as liquidity has dried up. No funding is available and no banks are taking counter-party risks, said Arvind Parekh, CFO, JSL (the new name for Jindal Stainless).

The overnight Libor climbed 431 basis points to touch an all-time high of 6.88 per cent on Tuesday, the British Bankers' Association told Bloomberg, after the US Congress rejected a $700 billion bank-rescue plan that could have infused liquidity.

The seizure in the credit markets is tipping lenders toward insolvency, forcing US and European governments to rescue five banks in the past two days. Funding constraints are being exacerbated as companies try to settle trades and buttress balance sheets over the quarter- end, balking at lending for more than a day.

“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.'' Borrowing rates also rose in Asia.

Libor's surge means rising costs and reduced availability of credit for Indian companies. Experts feel only large companies would be able to make foreign currency borrowings at higher rates when the markets stabilise.

Parekh said the business confidence is getting impacted. RBI should intervene and infuse liquidity into the system. This will send a signal that rates are not going up. It should also not allow the Rupee to depreciate as lot of items are imported, added Parekh.

“Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down,” said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank NV in Sydney.