india inc: The dollar route to India Inc loans – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/the-dollar-route-to-india-inc-loans/articleshow/92883707.cms

Synopsis

Both external debt as a ratio of gross domestic product (GDP) and debt service as a ratio of export of goods and services have declined in the 12 months leading up to March 2022. With commercial borrowings becoming less appealing, this trajectory can reasonably be expected to be maintained, despite the central bank’s efforts to prop up ECBs. India Inc is turning to costly local credit to fund growth at a time foreign equity investments are in flight.

The demand for dollars could climb as companies roll over foreign loans in the middle of hardening interest rates, a heightened need for hedging currency risk and tougher rules on lending to sustainable enterprises. Around 43.1% of India’s $620.7 billion external debt will mature over 12 months, and India Inc may have lost some appetite following a borrowing spree at very low interest rates during global monetary easing and stable exchange rates. Over 40% of outstanding external commercial borrowings (ECBs) are reckoned to be unhedged, and hedging costs have spiked in the last few months as the rupee has depreciated against the dollar. The bar for environmental, social and governance (ESG) compliance has also been raised, and smaller Indian companies may find it difficult to meet criteria set for accessing credit abroad.

Then again, interest rates are hardening faster abroad than at home. ECBs are mainly based on up to one-year Libor (London interbank offered rates), which have run up even quicker. Add in the hedging cost and the interest rate differential narrows considerably. The Reserve Bank of India (RBI) has, for the next six months, doubled the ceiling for ECBs in the automatic route to $1.5 billion from $750 million to help companies get over the repayment hump. It has also allowed investment-grade companies a higher all-in cost, including items like arranger and processing fees, by up to a percentage point. This easing of credit controls will, however, have to contend with bigger fundamental forces at play, such as the strain on India’s capital and current accounts.

Both external debt as a ratio of gross domestic product (GDP) and debt service as a ratio of export of goods and services have declined in the 12 months leading up to March 2022. With commercial borrowings becoming less appealing, this trajectory can reasonably be expected to be maintained, despite the central bank’s efforts to prop up ECBs. India Inc is turning to costly local credit to fund growth at a time foreign equity investments are in flight.

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