Firms avoid ECBs as fall in rupee raises hedging cost

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The rupee depreciating lately has kept companies away from the external commercial borrowing (ECB) market as cost of hedging goes up with bankers insisting that companies go in for hedge cover.

RBI in last money policy asked banks to submit by December 31 a list of borrowers with unhedged ECBs. The rupee on Monday opened at Rs 55.07 to the dollar and closed at Rs 55.06. In October it was at Rs 51.37.

Agam Gupta, trading head at StanChart, said, “The depreciating currency is a disadvantage for companies raising money without hedging, as there is always exchange risks. Most Indian companies prefer to raise cheap money overseas without hedging. If it is hedged the funding cost differential between rupee borrowing and dollar borrowing is only 50 to 100 basis points.

“When the rupee appreciates there is greater enthusiasm to raise money overseas as companies then get the double benefit of raising cheap money and an appreciating currency, which lets them make dollar repayments with less rupee funds.”

Most of the ECBs have been contracted to refinance rupee loans or foreign currency convertible bonds. Though there is liquidity in overseas markets now, volatile exchange rates have forced companies to stay away from the market. The $40 billion a month bond-selling programme of the Federal Reserve is creating liquidity in overseas markets.

Parthasarathy Mukherjee, Axis Bank head of treasury and international banking, “The depreciating rupee is certainly a concern. But demand in the ECB market is subdued because the overall corporate demand is subdued. Companies are now forced to hedge as lenders insisting on hedging. Companies would like to raise money without hedging but the volatility in the exchange rate makes hedging essential.”

Most ECBs are of three or five-year tenure and usually benchmarked against the six-month Libor, which is now 0.6 per cent. Among the companies which sought permission to raise large ECBs in September are Jaiprakash Associates ($150 million, to redeem its FCCBs) and GAIL ($300 million, to refinance rupee loans).

Abhishek Goenka, CEO of India Forex Advisors said, “Most are raising money to refinance existing credit lines and also to redeem their FCCBs. The rupee fell to a two-month low at Rs 55.22 last week after the October trade deficit rose to a high on the back of negative export growth.”

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