Falling Premiums

Market sources say the cheap rates may not sustain for long, hence the corporates' rush for such borrowings as also for far-forward cover.

Last year, the rupee depreciated by only 4 per cent. The depreciation of 7.5 per cent implied in the early one-year forward quotes of Rs 38.50, therefore, seemed unrealistic to corporates.

But, it was a good price to sell: the far-forward market was a one-way seller's market.

However, with premiums falling to a more realistic 5 per cent, buyers have returned to the market.

Enthused by the lower cost of covering the exposures beyond 6 months, more corporates have been opting for FCNR(B) loans and external commercial borrowings.

The economics makes sense. Borrowing at Libor (6 per cent) plus a spread of 150 bp, the all-in cost for corporates would be less than 12.5 per cent: 7.5 per cent plus cover costs of 4.8 per cent.

In contrast, the prime lending rate of banks is 13.5-14 per cent. In fact, for most corporates, the cost is two percentage points higher.

Indeed, given the small differential between six-month premiums at 4.7 per cent and one-year premium at 4.8 per cent, it makes more sense for corporates to lock in their exposure for one year rather than take a six-month cover and renew at the end of the period.

As a result of the increased liquidity, the spread between the far-forward premiums has come down from 20 paise to 10 paise now.

Foreign banks are report good business, with deals in the range of $100 to $200 million.