 "Corporates find themselves on the edge as bond yields rise")
As global funds cut holding of local debt to a 19-months low of $28.7 billion, Indian corporates are seeing themselves at the cusp of an evolving crisis.
This has led to yields on 10-year government securities surge 122 basis points in the past month to a five-year high of 9.15% as bond prices go down.
"Lot of corporate money is parked in liquid funds while banks have subscribed to governments bonds. Now with the bond prices going down they will have mark to market losses," says Paras K Chowdhary, director at leading tyre maker Ceat.
"RBI's recent measures to defend currency have not really worked as they have lost out on both growth and sentiments while the currency’s depreciation couldn’t be stopped," he says.
"RBI's recent measures to defend currency have not really worked as they have lost out on both growth and sentiments while the currency’s depreciation couldn’t be stopped," he says.
The RBI cut the amount firms can invest overseas without prior approval to 100% of net worth, from 400% on 14 August. It further put curbs on residents to remit only $75,000 a year versus the previous limit of $200,000. On August 13, government raised tariffs on gold imports and banned inward shipments in the form of coins and medallions to narrow the trade deficit.
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The rupee depreciated 14.7% since March and touched an all-time low of 64.12 per dollar today. Swiss banks UBS and Credit Suisse are respectively expecting the currency to decline to 70 and 65 per dollar due to slow economic growth and a record current account deficit. This has led foreign institutional investors pull out of funds in India as their return gets impacted when it is converted in dollar. Besides the US government prepares to pare stimulus and that can provide better dollar based return in the US.
“Companies from infrastructure sector that issue bonds of different durations besides commercial papers to mobilize resources will see serious issues now as investors will not get the yield what they are asking in revised scenario,” says Prabal Banerjee, president International finance at Ruia brothers promoted Essar group.
Overall profitability of companies are going to get impacted which will affect government’s tax mop ups and the government will have to borrow further to meet its needs.
“We are almost at the cusp of an evolving crisis as India is no more seen as an attractive destination for investments by the FIIs,” says M S Unnikrishnan, managing director, Pune based capital goods maker Thermax.
“Rupee will further devalue hence imports will be expensive which will ultimately impact government’s effort to curb inflation if the corrective steps are not taken in time,” he says pointing out the need to curb import on unproductive items such as gold.
This is ultimately going to further push the borrowing rates which will impact the rate sensitive industries. “We expect borrowing rates to go up and that will affect companies like us who are in the construction industry,” says Sanjeev Churiwala, chief financial officer Ambuja Cements.