Ongoing depreciation of the rupee to add to India Inc's borrowing woes

The ongoing depreciation of the rupee is set to make borrowings in foreign currency expensive for corporate India and impact bottom lines. Analysts say corporate houses will have to absorb this rise in costs, given limited borrowing opportunities in the domestic market.

“Public sector banks, the primary lenders to corporate houses, are not in a position to offer large incremental loans because of losses arising from mounting bad loans,” said Soumyajit Niyogi, associate director, India Ratings & Research. He said companies have no option but to look for external sources of funds.

“As far as cost is concerned, again due to sentiment, there could be an increase of 25-50 basis points due to country risk perception. There will be additional cost if the country risk profile changes and borrowers have to bear that in their cost structure,” said Prabal Banerjee, president, Bajaj group. One basis point is one-hundredth of a per cent. 

The effect of depreciation has already begun to seep into earnings, with Corporate India’s combined interest expenses growing at the fastest pace in the past 11 quarters during the April-June 2018 period.

Indian corporate houses, especially banks, have been one of the top borrowers from emerging economies in the global markets. In all, Indian corporate houses have raised nearly $42.3 billion in foreign currency debt during the year ended March 2018, according World Bank data — highest among emerging markets outside of China. Turkish firms followed closely, with incremental borrowings of $40 billion during this period. 

India’s total external debt was up around 12.5 per cent in the past 12 months to $530 billion at the end of March 2018 from $471 billion at the end of March last year. In comparison, India’s external debt was stagnant for three years between 2014 and 2016. 

The recent fall in rupee will raise funding costs, as lenders ask for larger spread over the London Interbank Offer Rate (LIBOR) from Indian borrowers to make up for the rise in rupee-depreciation risk, analysts say. For example, the one-year forward premium in the dollar-rupee exchange rate is up 90 basis points from its lows in September 2017 to 320 basis points now. Forward premium is the difference between the forward rate of the rupee and the spot rate.

So far this year, it has been a borrower’s market with Indian companies having paid average spread of 118 basis points on five-year dollar syndicated loans, the lowest since 2005, according to data compiled by Bloomberg.

The worst affected would be importers and companies with large unhedged foreign exchange position. According to a study by India Ratings, only 42 per cent of the total foreign debt by corporate houses was hedged at the end of March 2017. 

“Companies largely fund their imports through trade credits and advances. The credit cost is up sharply after the recent fall in rupee against US dollar, as lenders ask for extra margins to make-up for the fall in rupee. This is a double whammy for companies in sectors such as capital goods, chemicals, auto ancillaries and power that rely on imported inputs,” said Dhananjay Sinha, head research at Emkay Global Financial Services. 

Rupee is down nearly 8 per cent against US dollar in the current calendar year so far, against a 6 per cent appreciation in 2017.

According to the World Bank data, corporate India’s (non-government and non-bank borrowers’) trade credit and advances were up 16 per cent during 12 months ended March 2018 to $100.4 billion.  Analysts expect the trend to continue, given corporate India imports exceeds exports and the former is growing faster. In all, BSE500 companies (excluding banks and financial firms) spent Rs 11.5 trillion on imports of goods and services in FY18, up 11.8 per cent on a year-on-year basis.

It exceeded their exports or foreign exchange earnings by nearly Rs 3 trillion, versus a difference of Rs 2.7 trillion a year ago. Imports exceeded exports for companies in 37 of 61 industries (according to Capitaline database classification) in FY18. Oil and gas companies were the biggest importers, while IT companies such as Tata Consultancy Services, Infosys and Wipro as well as pharma firms are the biggest earners in India Inc. 

On the brighter side, rupee depreciation is likely to benefit export-oriented industries and commodity producers, according to India Ratings.