MUMBAI: Cost-of-capital risks at Indian companies, which had borrowed overseas to take advantage of lower interest rates, could rise with the current tightening in the US rate cycle and a sharp fall in the local unit against the dollar.
The all-inclusive cost of borrowing from overseas has increased by more than 100 basis points in the last one year as higher rates have also meant that the cost of hedging currency risks is higher.
One basis point is 0.01 per cent.
“Triple A companies will have to pay 9.5 per cent including swap costs for five year money now, which was close to 8 per cent a year back. Overseas rates have increased and the cost of hedging has also gone higher, which makes it more expensive for Indian companies to borrow from abroad now,” said Manish Wadhawan, head of fixed income at HSBC India.
As a result, companies that borrowed in dollars in the past to leverage lower rates are staring at huge losses as their repayment could turn out to be costly, wiping out the benefits. Both domestic and global rates are trending higher, with the US Federal Reserve already raising its benchmark rate twice in 2018 and signalling two more increases in the rest of 2018.
“The outlook on the rupee looks difficult because this is a rare occasion when both oil prices as well as the rupee are firming up. Companies that have dollar repayments will have to shell out 4-5 per cent extra to take into account the higher interest rates and weakness in the currency,” said R Govindan, head of treasury at engineering to information technology conglomerate L&T Group.
The Indian currency has been under pressure since the start of the year, losing 8 per cent of its value in 2018. Bankers said the currency is likely to remain in stress for the rest of the year as external factors weigh on it and as support from foreign institutional investors is not forthcoming. On Thursday, rupee breached the ?69 per dollar mark for the first time ever, weakening to an all-time low of ?69.09 per dollar.
Some bankers say that Indian companies are in a much better position this time round having learnt their lesson from the last currency crisis in 2013. However, persistent pressure on the rupee will force companies to refresh their hedging strategies.
“The macro economic situation is crucial. It is important that we do not lose control of inflation and our current account deficit like in 2013. Until our macro is stable, we can manage rupee at 70 per dollar even though it will be difficult to manage,” Govindan said.
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