India Inc.’s record pace of debt fundraising may be set to slow as a jump in hedging costs makes those deals more expensive.
Since the start of the year local companies have raised a record $12.9 billion via offshore bonds and $12.3 billion from loans, the highest in three years, according to data compiled by Bloomberg. Falling dollar borrowing costs and improved investor appetite for emerging-market debt have driven the spree.
But the jump in deals has also raised the cost to hedge against moves in exchange rates, diminishing the attractiveness of borrowing overseas for companies. Forward premiums in the local currency market shot up to the highest since May 2017 last week as demand for hedging contracts surged. The central bank has also not swapped dollars for rupees since April, which helped cool increases in forward premiums.
“It’s a concern for everybody if there’s a lot of foreign loans outstanding and premiums are rising due to that,” said Prabal Banerjee, group finance director at conglomerate Bajaj Group. “Many good companies have borrowed funds via offshore bond issuance. This has led forward premia to go through the roof.”
The Reserve Bank of India swapped a total of $10 billion in March and April, with demand topping targets at both months’ currency swap auctions.
“RBI has taken steps in the past to absorb dollar inflows through currency swaps, which had the effect of bringing down the forward premiums,” said Bajaj’s Banerjee. “RBI may need to take more steps if premium levels stay elevated.”