Rupee fall to add to cos' interest burden

Indian corporate bodies that tapped foreign funds to take advantage of cheaper loans may now have to shell out additional funds to service these, thanks to the depreciating domestic currency. The rupee has depreciated 18 per cent against the dollar in a span of three months.

According to Reserve Bank of India (RBI) data, there have been external commercial borrowings (ECBs) to the tune of $28.7 billion in the January-September period. Foreign borrowings increased, as domestic loan rates became expensive due to RBI's monetary tightening policy.

Companies with access to foreign funds were able to raise funds at around five-seven per cent, compared with domestic borrowing at 12-14 per cent. At that time, the rupee was trading at around 44-45 against the dollar.

Indian banks increasingly supported ECBs of their Indian clients. “Our total ECB book is about $15 billion, and the total foreign asset book is about $30 billion. We have seen significant growth in the area," said Pratip Chaudhuri, chairman, State Bank of India.

“Much of the growth in the overseas book was due to trade finance and Indian companies raising relatively cheap funds abroad," said Alok Misra, chairman and managing director, Bank of India.

The strengthening dollar, amid the risk aversion, led to depreciation of the rupee. “This naturally translates into an increased burden on Indian companies in repaying ECBs. The additional burden works out to $5.4 billion, that is, an additional burden of about Rs 27,000 crore," said Jagannadham Thunuguntla, strategist & head (research), SMC Global Securities. However, the calculation assumes none of the borrowers are fully hedged, he said.

Bankers said it was made sure the borrower was fully, or at least partially, hedged against foreign exchange fluctuations. “While it is true that all our customers are not fully hedged, we do put a condition that the company hedges to some extent," said a senior official of a large public sector bank.

However, a sharp and continuous drop in the rupee's value caught many on the wrong foot. “Three months ago, when the rupee was trading at three-year high levels of 44 against the dollar, nobody would have thought it would fall to 52-53 levels in such a short period," said a forex dealer and a consultant with a domestic brokerage.

“Several companies must have now learnt they would have been better off had they borrowed in Indian rupees instead of ECBs," said Thunuguntla. Today, the reversal in the euro-dollar exchange rate helped the rupee recover from an all-time low of 52.73 to close at 52.32 against the greenback.