Fed effect: ECBs may fall out of favour

The US Fed rate hike might not have altered the short-term view on local interest rates but it has forced bankers to revisit the medium-term outlook and also reassess the corporate borrowing preferences.

Dollar borrowings seem to be heading for the back seat. Says Monish Tahilramani, head of treasury at HSBC, "On a fully hedged basis, external commercial borrowings look an expensive proposition yesterday. Companies with moderate funding needs are likely to prefer rupee route."

According to P H Ramaswami, head of treasury at Calyon Bank, "The Fed rate has already been discounted. While the refrain is towards a general firming up of the interest rate, players will pause till the Budget."

A few months back, a corporate could raise ECB at 150-200 basis over Libor, which amounted to around 3.2/3.5 per cent for 5 years.

Now, with the six-month Libor at 1.9 per cent and six-month forward dollar premium at 1.80 per cent, and transaction costs and withholding tax adding up another 1 per cent, a six-month floating rate works out to 4.7 per cent.

On the other hand, in a rising interest rate scenario, a AAA-rated corporate can get a 10-year rupee loan at 6.5 per cent.

While the Fed rate hike of 25bps has acted as a positive trigger for the markets, its statement has left the market pondering, said a dealer with a foreign bank. Market players were expecting the Fed to state whether the hike is part of a continuous process.

But nothing was specified on this front. But reacting to higher inflation numbers, the Fed is understood to have stated that a portion of the inflation was due to "transit factors", which, analysts indicated, was a reference to the rising oil prices.