Domestic companies will continue to borrow from global markets despite rising US interest rates as overseas rates are still competitive, corporate treasurers said. | |
| Firming local rates have led large companies to look abroad to reduce costs, but smaller companies may turn to local markets owing to higher hedging cost, they said. |
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| "Indian interest rates are also going up along with the US rates, which means that the rupee cost will also go up. So, at a broader level it won't matter, but smaller companies may start looking at local market," said R Govindan, treasurer, Larsen & Toubro Ltd. |
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| The US Federal Reserve on January 31 hiked its target fund rate for the 14th consecutive time by 25 basis points to 4.50 per cent. |
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| Earlier, on January 24, the Reserve Bank of India hiked both its reverse repo and repo rates by 25 basis points each to 5.50 per cent and 6.50 per cent, respectively, as a pre-emptive step to contain inflationary expectations. |
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| "The most tracked 6-month London interbank offer rate has increased to 4.85 per cent currently compared with 3.35-3.40 per cent in April 2005, which is a rise of about 150 basis points," said a merchant banker. |
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| "With the US rate hikes likely to continue and the European Central Bank also likely to hike rates twice this year, LIBOR may stay firm," the merchant banker added. |
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| However, although US target fund rate has been continuously hiked in each of the rate-setting meets since June 2004, overseas borrowing by Indian companies has shown no signs of easing. |
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| According to the latest RBI figures, companies raised $967 million in November via external commercial borrowings and foreign currency convertible bonds compared with $611 million in October. |
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| Reliance Industries ($210.24 million) and Maruti Suzuki Automobiles India Ltd. ($102 million) were the large companies that borrowed in November. |
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| Some of the companies that have got RBI approval for overseas borrowings are Adlabs Films, Lupin, Noida Toll Bridge Co., United Phosphorus, Matrix Laboratories, Sterling Holiday Resorts, Crest Animation, and Electrosteel Castings. |
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| "There is still a restriction on for what usage a company can borrow. But despite the hike in the rates, the arbitrage opportunity is still attractive for a company to go for overseas borrowing," said Deepak Mundra, general manager-finance, Grasim Industries. |
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| According to RBI norms, "ECB proceeds cannot be used for onward lending or investment in the capital market or real estate business or for working capital, general corporate purpose and repayment of rupee loans." |
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| Maximum ECB amount permitted under the automatic route is $500 million with a minimum average maturity period of five years. |
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| ECBs up to $20 million are permitted with minimum average maturity period of three years. However, smaller companies may feel the pinch of higher interest rates abroad, treasurers said. |
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| "Bigger companies which can command a rate and have got a lower credit spread will not be impacted. But the higher forward premiums and Mifor will certainly take the hedging cost up," said N.S. Paramsivam, head, foreign exchange and treasury, Essar group. |
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| Mifor swaps have been rising sharply since January and are seen staying firm, reflecting the underlying forward dollar/rupee premiums, owing to the tight interbank liquidity. |
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| Liquidity in the banking system has been under pressure since December following third quarter advance tax payments by companies and Rs 330 billion outflow for redemption of State Bank of India's India Millennium Deposits. |
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| The most tracked 5-year Mifor swap had touched and all-time high of 6.88 per cent on January 31. |
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| The 1-year premium had risen to 2.05 per cent that day. In the near term, liquidity is expected to improve following dollar purchases by the Reserve Bank of India. |
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| However, pressure on liquidity is likely to remain as the government's 2005-06 borrowing programme is yet to be completed. Advance tax outflows for the last quarter of this financial year will add to the liquidity pressure. |
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| Despite the high interest rates and a possibility of rates going higher, companies would still prefer borrowing from abroad, albeit with a little more caution. |
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