Trade credit, ECB add to pressure on exchange rate

Written by Aparna Iyer | Mumbai | Updated: Nov 14 2012, 07:54am hrs
Short-term debt components, such as trade credit and external commercial borrowings, which tend to make the exchange rate volatile, have started rising again. Its possible that increasing short-term liabilities could pressure the countrys balance of payments in the coming quarters, say economists. Short-term trade credit can create a lot of volatility in the rupee, said Abheek Barua, chief economist at HDFC Bank, observing that such loans have risen again. However, repayments should not be an issue. Indias foreign exchange reserves stood at $295 billion as on November 2 and seem to be comfortable to meet the short-term debt obligations.

Trade credit of about $80 billion is due for repayment between June 2012 and June 2013. Along with this, ECBs raised during the boom period of 2002-2007 are also due for redemption. Around $21 billion worth of ECBs will have to be repaid and along with non-resident Indian deposits and other short-term loans, the total debt stock that is up for repayment is a whopping $150 billion.

Meanwhile, short-term trade credit surged 8% during April-June to $70.51 billion from $65.13 billion in the previous quarter, according to data from the Reserve Bank of India; in previous quarters, trade credit had grown by just 4-5%. Economists said that trade credit has risen in the July-September quarter as well but were unwilling to estimate the amount. Data for July-September trade credit will be released by end of December as the RBI puts off balance of payments data with a lag of a quarter. Trade-related credit such as buyers credit or export credit are typically loans of up to one-year tenure while external commercial borrowings (ECBs)are both short term and long term.

However, refinancing debt may not be too hard. Barua said that with the concern of a downgrade of Indias sovereign rating receding and the US Federal Reserve committed to quantitative easing, many banks are willing to lend to Indian companies. Asian banks are willing to give loans and there is a spurt of ECBs and trade-related loans now, an investment banker said adding that European banks that dominated as lenders of forex loans no longer do so given the debt crisis in that region.

While all of the debt may not be repaid and most may be rolled over, the pressure on the exchange rate is palpable. In 2011-12 short-term debt of around $130 billion was due for repayment when the current account deficit amounted to a record $78.2 billion. Dollar inflows fell short of the amount required to bridge the gap and the impact on the rupee was evident. The currency depreciated 12% during that year even after the RBI sold $13 billion to stem the fall. The rupee has depreciated another 11% in the first three months of 2012-13 but largely due to global risk aversion and fears of a downgrade. While the debt repayments may not drag down the currency in a similar way, they may deter the RBI from intervening in the foreign exchange market, economists said.