India Inc gives Rs 4.5-lakh-cr forex debt headache

Rupee's stability in last 12-18 months made companies reduce hedging

Indian companies’ foreign currency debt exceeded Rs 4.5 lakh crore in 2014-15, a large portion of which remained unhedged, giving fresh headache to their investors and the Reserve Bank of India (RBI). The rupee has been hovering around 63-64 a dollar.

According to an India Ratings study of corporate balance sheet, available for the 500 largest listed borrowers in 2013-14, aggregate debt increased to Rs 28.7 lakh crore, of which about Rs 4.5 lakh crore was dollar-denominated debt, compared with Rs 4.2 lakh crore in the year-ago period.

“In the past 12 to 18 months, the rupee’s stability has made some of the corporate houses assume that the Indian currency will remain stable. So they have reduced hedging, at the cost of caution,” said Deep N Mukherjee, senior director at India Ratings & Research. Mukherjee said the debt figure went up further in 2014-15, but he declined to give an estimate.

“The risk is that the rupee might touch 65 a dollar during the course of this year. There are global risks that include the US Federal Reserve’s outlook on tightening, how the situation pans out in the euro zone and whether China’s growth slows down further,” said Anindya Banerjee, currency analyst, Kotak Securities.

For companies with non-investment grade, borrowing cost for dollar debts varied from eight to 10 per cent, depending on tenure.

With an additional five to six per cent cost for hedging, this became completely unattractive vis-a-vis domestic borrowing.

So, these companies kept their exposure largely unhedged.

“Currently, these companies are more vulnerable to any external currency shock that might happen due to a rise in US interest rates. Since a large number of companies might be affected, an external currency shock could push back India’s recovery by good 18-24 months,” said Mukherjee.

In its financial stability report released last month, the RBI highlighted the problem: “Given that muted global growth is expected and the possible lower trend in capital inflows following the likely increase in policy rates in the US, risks emanate from uncertainties in crude oil prices, as well as from lower exports. Further, possible adverse exchange-rate movement arising out of financial market volatility might affect companies with unhedged foreign exchange exposures and have implications for financial stability,” the RBI said. A survey by Bank of America Merrill Lynch pointed out that despite the RBI nudging corporate houses to be hedged in order to seek protection from the rupee’s volatility, there were several companies that were underhedged. Of the Indian chief financial officers surveyed, two-thirds said they had a significant exposure to the dollar but only 53 per cent said they were hedged against currency volatility.

This survey included the view of 630 respondents across the Asia-Pacific region. Of them, 75 were from India. The Indian CFOs were from companies with annual revenues of more than $1 billion.

Kavish Arora, managing director & head of banking at Bank of America Merrill Lynch India, said: “Some of the companies that we spoke to said they were planning to hedge but were delaying the process in view of the cost. They were hoping the rupee would strengthen with a positive sentiment in the economy, and thought they could hedge then.”

Utility and infrastructure companies earning in rupees but having borrowing in dollars were especially sensitive to the rupee’s depreciation. “The companies with term loans will face immediate pressure with the rupee’s depreciation as they have amortised repayments every year, along with the interest payment costs,” says Vikas Halan, vice-president, corporate finance group, Moody’s Investors Services.