The government and the Reserve Bank of India (RBI) are considering making currency hedging mandatory for companies availing external commercial borrowings (ECBs), officials told FE.
ECBs are the most popular instrument for Indian companies raising debt overseas. For lenders, including foreign banks and agencies such as the World Bank and International Monetary Fund, the ECB route makes sense as it is the borrower who assumes currency risk as opposed to rupee-denominated overseas bonds, in which the lender takes on risk.
Currently, it is not mandatory for companies to hedge their ECB loans. Though it leads to some savings, in case of a weakness in the rupee, it hurts the companies? ability to pay back the loan.
?When the rupee starts tumbling, it is the RBI that is forced to intervene by selling dollars to shore up the currency. So, although Indian companies assume risk, it is the RBI that pays the price,? a senior government official said.
Over April 2013-January 2014, Indian companies borrowed about $25.39 billion through the ECB route. Officials say less than 10% of this is actually hedged, leaving the balance exposed to fluctuations in the exchange rate.
The proposal to make currency hedging mandatory for ECBs was at an early stage but gaining wide acceptance, sources say, adding that the finance ministry and the RBI will go through the usual process of having meetings among themselves and with various stakeholders. It is unlikely that the final announcement will be made by the current government, but officials privy to the matter say that whatever be the political hue of the next government, this proposal might go through, and may find a mention in the full Budget to be presented in July.
While such a move will mean additional costs for companies, officials insist that it is the smaller firms, with little or no international exposure, that need to hedge.
?If you are an Indian multinational with assets in various countries, that acts as a natural hedge because they have foreign exchange coming in there. It is the relatively smaller companies, which take ECB for domestic expansion, that don’t have any natural forex exposure. They need to hedge,? the official said.
Between July and August last year, fears of a sudden taper by the Fed left emerging market currencies bleeding and India was no exception. The rupee fell by more than 20% to touch its life-time low of 68.85 on August 28, and the RBI was forced to intervene to prevent a further slide. It sold dollars through public sector banks and also opened a special window to sell dollars directly to oil PSUs such as ONGC and Indian Oil. The RBI also mopped up dollars through foreign currency non-resident (banks) deposits and overseas foreign currency borrowings to add to the country’s forex reserves.