ECB repayment turns costly for India Inc as rupee weakens

Nearly $50 bn loans due for repayment in FY17 & FY18, making India Inc liable to currency volatility

If the decline in demand due to demonetisation wasn’t enough of a problem, Corporate India faces another challenge: the repayment of external commercial borrowings (ECBs). According to data from the finance ministry, $29 billion worth of ECBs are due for repayment during the current financial year. Besides, another $19.6 billion worth of ECBs are due for repayment in FY18.

In all, $207 billion worth of foreign debt were up for repayment at the end of March 2016. A bulk of this is accounted for by non-resident deposits ($90.4 billion) and short-term debt ($83.4 billion), including investments, by foreign institutional investors (FIIs) in sovereign debt and commercial paper.

 

The depreciation in the rupee after demonetisation and Donald Trump’s victory in the US has raised the ECB bill in rupee terms, while companies’ repayment ability is set to decline in the second half of FY17 due to a slowdown in demand and revenue. The rupee is down 1.8 per cent since November 8, the day Trump won the US Presidential election and the Narendra Modi-led government in India announced demonetisation of Rs 500 and Rs 1,000 notes.

Trump’s victory, coupled with the likelihood of an interest rate hike in the US, resulted in a capital outflow from emerging markets, and India has been no exception to this. In all, foreign investors have withdrawn nearly $11 billion from Indian equity and bond markets in the past three months, putting a downward pressure on the rupee.

Analysts say that Corporate India’s financial difficulty has been magnified by the demand slowdown triggered by the cash crunch. “If not for the volatility induced by recent events such as currency demonetisation and Trump’s victory and a rate hike in the US, foreign currency debt was hardly an issue for corporate, given the benign capital inflows in India,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

According to his estimates, foreign debt, including ECBs, is about 25 per cent of Corporate India’s net sales, excluding banks and financial companies, up from 15 per cent in the pre-Lehman crisis period.

In comparison, exports or foreign exchange (forex) revenues accounted for 21.1 per cent of Corporate India’s net sales in FY16 – up from 20.1 per cent a year ago. The data is for the common sample of companies from BSE 500, BSE Midcap and BSE Smallcap indices, excluding banks and financials, and oil and gas companies. The corresponding figure for oil and gas companies was 14.6 per cent in FY16.

This makes foreign capital inflows crucial for Corporate India to meet its forex obligations. Corporate India’s exports or forex revenues have been nearly stagnant in the last three years growing only at three per cent a year in rupee terms.

“The currency volatility will put additional pressure on the banking system, as companies may rush to domestic lenders to raise foreign exchange to service their external debt,” adds Sinha. The additional demand for dollars could lead to more depreciation in the rupee. 

Others, however, discount the fear, given a marginal decline in the rupee and India’s high foreign exchange reserves. “The rupee has declined only marginally despite nearly $26-billion worth of capital outflow on account of non-resident Indian deposit redemption and sell-off by FIIs. Some individual companies may face problems but I don’t see any systematic risks,” says G Chokkalingam, founder and chief executive officer, Equinomics Research & Advisory.