How Rupee rise helps overseas borrowers
MUMBAI: The surge in the Indian rupee is not all bad for the economy. This may be the best time for Indian companies that have borrowed overseas to cover their positions and wipe out at least their quarterly interest obligations.
Borrowings of Indian companies through overseas bonds and term loans stand at about $703 billion today, according to data from Dealogic, a Hong Kong-based analytics firm. Domestic companies have to repay $41.95 billion in 2017 alone and about $70 billion next year.
Overseas loans are typically covered against currency fluctuation risks through a hedging mechanism, which comes at a cost and is therefore avoided by some. The Reserve Bank of India is traditionally against unhedged loans because it exposes borrowers to a larger risk when the exchange rate swings wildly. Still, the rupee’s recent appreciation now means borrowers with unhedged loans need to repay less per unit dollar cost.
“Many Indian entities including short-term trade finance people remain unhedged for their offshore liability,” said Jayesh Mehta, country treasurer at Bank of America. “They are likely to have gained from the rupee’s sharp rise in the last few days. At least, interest liability has reduced, adding to balance sheet gains.”
The currency market will be driven by fund inflows for now with regulatory speed breakers expected to curb any wild swings, he said.
The rupee strengthened almost 2%, or 131 paise, against the dollar over the past five trading sessions as overseas fund inflows created demand for the local unit in the wake of the ruling Bharatiya Janata Party’s victories in state elections that are widely expected to accelerate the country’s economic reforms. Appreciation of the rupee means fewer local currency units are needed to buy a dollar.
“The recent appreciation in INR will help corporates with unhedged foreign currency liabilities, subject to this move sustaining over a period of time,” said Vijay Santhanam, Managing Director at Barclays India. The effect on ultimate interest costs on foreign currency loans also depends on sustainability of the unit’s strength, he said.
The level of unhedged corporate exposures in the system has relatively reduced due to regulations, dealers said.
“Some companies may strengthen their balance sheet with this unexpected rise in the rupee’s value,” said Abhishek Goenka, founder of IFA Global. “At least one or two quarterly interest and principal repayments will be positively impacted. For importers with unhedged positions, this is also a golden opportunity to book forwards contracts.”
Three-month forwards – contracts for future transactions – are now available at 5%, little changed from a month ago. However, the rising rupee makes it a cheaper bet for importers to cover their exposures.
Market estimates suggest that although large companies are largely hedged or naturally hedged, a substantial portion of mid- and small-sized companies remains without cover to avoid the extra cost.
Power Grid Corp, Reliance Industries, Adani Group and Tata Group are some of the top borrowers in the overseas market.
Borrowings of Indian companies through overseas bonds and term loans stand at about $703 billion today, according to data from Dealogic, a Hong Kong-based analytics firm. Domestic companies have to repay $41.95 billion in 2017 alone and about $70 billion next year.
Overseas loans are typically covered against currency fluctuation risks through a hedging mechanism, which comes at a cost and is therefore avoided by some. The Reserve Bank of India is traditionally against unhedged loans because it exposes borrowers to a larger risk when the exchange rate swings wildly. Still, the rupee’s recent appreciation now means borrowers with unhedged loans need to repay less per unit dollar cost.
“Many Indian entities including short-term trade finance people remain unhedged for their offshore liability,” said Jayesh Mehta, country treasurer at Bank of America. “They are likely to have gained from the rupee’s sharp rise in the last few days. At least, interest liability has reduced, adding to balance sheet gains.”
The currency market will be driven by fund inflows for now with regulatory speed breakers expected to curb any wild swings, he said.
The rupee strengthened almost 2%, or 131 paise, against the dollar over the past five trading sessions as overseas fund inflows created demand for the local unit in the wake of the ruling Bharatiya Janata Party’s victories in state elections that are widely expected to accelerate the country’s economic reforms. Appreciation of the rupee means fewer local currency units are needed to buy a dollar.
“The recent appreciation in INR will help corporates with unhedged foreign currency liabilities, subject to this move sustaining over a period of time,” said Vijay Santhanam, Managing Director at Barclays India. The effect on ultimate interest costs on foreign currency loans also depends on sustainability of the unit’s strength, he said.
The level of unhedged corporate exposures in the system has relatively reduced due to regulations, dealers said.
“Some companies may strengthen their balance sheet with this unexpected rise in the rupee’s value,” said Abhishek Goenka, founder of IFA Global. “At least one or two quarterly interest and principal repayments will be positively impacted. For importers with unhedged positions, this is also a golden opportunity to book forwards contracts.”
Three-month forwards – contracts for future transactions – are now available at 5%, little changed from a month ago. However, the rising rupee makes it a cheaper bet for importers to cover their exposures.
Market estimates suggest that although large companies are largely hedged or naturally hedged, a substantial portion of mid- and small-sized companies remains without cover to avoid the extra cost.
Power Grid Corp, Reliance Industries, Adani Group and Tata Group are some of the top borrowers in the overseas market.
