Indian companies are likely to be severely impacted by the rupee’s depreciation against the dollar given the large foreign currency debt on the books and only partial hedging, according to Crisil Research. The rupee’s depreciation will lift input costs across many sectors amidst weak demand environment. Even exporters are unlikely to benefit significantly as clients may seek to renegotiate contracts, a report by Crisil states.
“Corporate India had forex debt outstanding of over $200 billion as of March 2013, of which close to 45% is short-term debt. Moreover, only half their forex exposure is hedged. Persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing overseas,” Crisil Research president Mukesh Agarwal said. The rupee fell to a all-time low of 61.21 against the dollar on Monday.
Companies have been borrowing from overseas due to lower interest rates. For companies in the CNX Nifty (excluding banking and financial services), about 40% of debt is denominated in foreign currency. However, persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing overseas.
Sectors that will be negatively impacted by the rupee’s depreciation include automobiles, auto components, airlines, consumer durables, oil marketing companies, and fertilisers. The benefits for export-oriented companies, generally the biggest beneficiaries of a depreciating currency, will also be limited as clients are likely to renegotiate deals, according to the report.
Although the rupee is expected to strengthen from its current levels, the 2013-14 average will still be 5-8% weaker than the 2012-13 average, the report said.