MUMBAI: The government's move to widen the scope of external commercial borrowing to let the debt-laden telecom and aviation companies raise funds overseas may be too little and too late as rising global interest rates will make borrowing in US dollars unviable.
The government's bid to arrest the fall of the rupee, which has plunged to life lows, may come a cropper given that yields across the board, including that of US treasuries, have risen more than a percentage point in the past two months.
Foreign portfolio flows in both equities and debt have turned negative after nearly a year of inflows, deteriorating the outlook on the rupee and boosting the cost of hedging. These factors make borrowing in Indian rupee cheaper.
"This would contribute to bringing in dollars, but not very substantially, I imagine," said Parthasarthy Mukherjee, president, large corporates and international banking at Axis BankBSE -6.55 %.
"It will only help companies with dollar receivables to tap the ECB market, since they will have a natural hedge. For others, after paying the hedging costs, the interest rate advantage would not come to much." For a triple A rated company, a US dollar loan may now cost more than 10%, given the market interest rate and hedging costs.
That makes borrowing in Indian Rupees cheaper. Policy makers are leaving no stone unturned to bring in US dollar flows following the 11% fall of the rupee since May. Foreign portfolio flow into debt and equity, which helped fund the record current account deficit, is reversing.
Overseas funds sold a net $1.76 billion of stocks in June, the highest since they pulled out $2.1 billion in August 2011. They sold bonds worth $5.4 billion in June. With the Federal Reserve poised to taper bond purchases by the end of the year, interest rates are climbing.
Former Goldman Sachs economist Jim O' Neil forecasts the yield on benchmark 10-year US treasuries to rise to 4% from 2.5% now. In fiscal 2012-13, ECBs formed the largest chunk of India's external debt. Indian companies borrowed $121 billion through the ECB route.
"For higher rated corporates, borrowing in rupee terms is now much cheaper than borrowing overseas, given the hedging costs," said Randhir Singh, managing director and India head, financing, Deutsche Bank. "Credit spreads on foreign currency borrowings have gone up significantly in the last two weeks."
According to RBI norms, companies cannot pay more than LIBOR plus 500 basis points for an external commercial borrowing. According to bankers, it may be difficult for companies to raise ECBs within these norms.
On Friday, US mortgage rates jumped to a two-year high. According to Bloomberg data, the rate on 30-year loan rose from 3.93% to 4.46% in a week, a rise not seen in 26 years.
indiatimes.com
The government's bid to arrest the fall of the rupee, which has plunged to life lows, may come a cropper given that yields across the board, including that of US treasuries, have risen more than a percentage point in the past two months.
Foreign portfolio flows in both equities and debt have turned negative after nearly a year of inflows, deteriorating the outlook on the rupee and boosting the cost of hedging. These factors make borrowing in Indian rupee cheaper.
"This would contribute to bringing in dollars, but not very substantially, I imagine," said Parthasarthy Mukherjee, president, large corporates and international banking at Axis BankBSE -6.55 %.
"It will only help companies with dollar receivables to tap the ECB market, since they will have a natural hedge. For others, after paying the hedging costs, the interest rate advantage would not come to much." For a triple A rated company, a US dollar loan may now cost more than 10%, given the market interest rate and hedging costs.
That makes borrowing in Indian Rupees cheaper. Policy makers are leaving no stone unturned to bring in US dollar flows following the 11% fall of the rupee since May. Foreign portfolio flow into debt and equity, which helped fund the record current account deficit, is reversing.
Overseas funds sold a net $1.76 billion of stocks in June, the highest since they pulled out $2.1 billion in August 2011. They sold bonds worth $5.4 billion in June. With the Federal Reserve poised to taper bond purchases by the end of the year, interest rates are climbing.
Former Goldman Sachs economist Jim O' Neil forecasts the yield on benchmark 10-year US treasuries to rise to 4% from 2.5% now. In fiscal 2012-13, ECBs formed the largest chunk of India's external debt. Indian companies borrowed $121 billion through the ECB route.
"For higher rated corporates, borrowing in rupee terms is now much cheaper than borrowing overseas, given the hedging costs," said Randhir Singh, managing director and India head, financing, Deutsche Bank. "Credit spreads on foreign currency borrowings have gone up significantly in the last two weeks."
According to RBI norms, companies cannot pay more than LIBOR plus 500 basis points for an external commercial borrowing. According to bankers, it may be difficult for companies to raise ECBs within these norms.
On Friday, US mortgage rates jumped to a two-year high. According to Bloomberg data, the rate on 30-year loan rose from 3.93% to 4.46% in a week, a rise not seen in 26 years.
indiatimes.com
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