Rising rupee lights up ECB avenue

The relentless rise in the rupee has made external commercial borrowings (ECB) a very attractive proposition to India Inc. Not surprisingly, a host of companies are lining up issues.

For a AAA-rated corporate, the cost of an overseas borrowing even on a fully hedged basis would be a good one per cent cheaper than a domestic borrowing.

"Over the last few days about 10-12 companies and financial institutions have firmed up ECB plans in the wake of the recent rally of the Indian rupee against the dollar and the softening of the forward premiums," said Roopa Kudva, executive director and chief rating officer of rating agency Crisil.

The list of entities that have been planning to raise ECBs includes National Thermal Power Corporation, Tata Steel (over $ 100 million), Vendanta ($ 300-600 million), ICICI Bank, Industrial Development Bank of India ($ 200-250 million) and Exim Bank among others, say investment banking sources.

When the domestic currency strengthens it works in favour of the borrower since the company would have to pay lesser amount of rupees to repay the same amount in dollars.

The Indian rupee has gained by 3.5 per cent over the last two weeks. It crossed the 44 mark on Monday to touch an eight month high of 43.6350/6450. Over the last one month the Indian rupee vaulted by over 5 per cent.

The forward premiums have also considerably softened thus making hedging against exchange rate risk very cheap. The one-year forward premium has slumped by over 1.25 per cent over the last two months to 1.00 per cent on Tuesday.

"Corporates will all look at the overseas market now for fund raising since interest rates globally have stabilised while rates in India are headed upwards. A lot of mid-pharma companies which have been watching the markets and are mostly likely to raise ECBs now than ever before," said the head of a foreign investment banking firm.

A triple-A rated corporate can raise a five-year ECB at 6.10 per cent on a fully hedged basis while it would cost about 7 per cent if the funds are raised domestically. The rate can be even more attractive if the borrower has a natural hedge (in the form of forex inflows) and does not need to hedge.

Corporates looking overseas will also mean a dearth of activity in the domestic corporate bonds market which has been dealt a double whammy in recent weeks with an FII investment limit put in place and overall rise in interest rates.

In the first six months of this fiscal amounts raised through ECBs peaked to a record-high of $5.1 billion. This compares with a much lower amount of $3.3 billion raised in 2003-04.