What we normally find is that 35-40% of commercial borrowings of companies is hedged. The remaining 60-65% is unhedged, Khan said at a panel discussion at a banking conference organised by Financial Times and Yes Bank. The deputy governor pointed out that the large unhedged forex exposure, together with excessive leverage that companies had indulged in, had resulted in the huge corporate debt restructuring (CDR) seen recently. Part of the CDR is because of unhedged forex exposure and partly it is because of excessive leverage, Khan said.
Outstanding external commercial borrowings of Indian companies stood at around $104 billion, out of which $22 billion matures over the next one year, according to latest RBI data. At the end of June, 2012, external commercial borrowings (ECBs) including foreign currency convertible bonds (FCCB) formed about 30% of the total outstanding external debt of the country and are rising further.
The economic slowdown and high interest rates have made repaying ECBs and FCCBs difficult for several companies, with some even defaulting on such payments. Suzlon Energy defaulted on repayment of $220 million worth of foreign currency convertible bonds last week after investors rejected the companys plea to extend the redemption date of bonds. Companies such as Wockhardt and Zenith Infotech have been dragged to court on defaults.
The Indian rupee has swung between 52 and 57 to dollar over the last five months. The currency had hit a trough of 57.32/$ in June and has since then recovered to around 52, closing at 52.85 on Tuesday. Over the last one year, Indian banks have restructured a large part of their loan portfolio as companies found it difficult to service their loans. The bulk of these loans were restructured through CDR. Around Rs 36,000 crore worth of loans have been referred to the CDR cell for restructuring in April-September.
Khan also said the country cannot finance its current account deficit through debt flows on a sustained basis. We will certainly welcome capital flows that are of durable nature, he said. Khan said the current account situation must improve through expenditure reduction or moderation in imports.
When asked whether quantitative easing by advanced economies impacts India adversely, Khan said emerging market economies such as India get adversely impacted because such easing drives up commodity prices.
However, quantitative easing would be beneficial in the long run for all economies as it would result in growth recovery of advanced economies and also expand trade, he added.
RBI to intervene on extreme R volatility
The RBI will intervene in the forex market in case of extreme volatility of the rupee as it has done in the past, Khan said. When there are extreme situations where there is extreme volatility...we have intervened in the past. If there are cases of extreme volatility, we will also intervene in the future, he said. He, however, said the stated policy of the RBI is not to intervene and let the market forces determine the exchange rate. Referring to the steps taken to check volatility, Khan said: We have taken both tactical and strategic measures. Government has also taken some steps.