Power sector lenders such as REC and PFC are unlikely to have an impact on their debt servicing cost after the Bank of Japan raised its policy rate to 0.25% as these public sector lenders, while evaluating any foreign borrowing proposal, consider the cost on a hedged basis.
Of the total foreign currency borrowings of REC, nearly $2.9 billion equivalent of total foreign currency borrowings are with Japanese Yen underlying. “A sizeable portion of the same is through fixed rate bonds or with coupon only swap wherein no impact will be seen in case of any change in policy rates,” REC said.
The industry had been concerned that some of the infrastructure projects in India, especially those in the power sector, which are directly or indirectly funded out of yen-denominated loans, could turn costlier with their debt-servicing costs inching up. However, the economy-wide impact could be marginal again, as the largest Japanese loans to India are under fixed swapped rates, with currency risks hedged.
“For the JPY floating benchmarks also, REC had considered the cost on the basis of the fixed swapped rates. Considering that JPY benchmark has been near-zero for a long duration of time, REC has been able to save a significant cost, and also even after recent increase in rates, the landed cost to REC is much lower than that estimated at the time of evaluation,” according to the company.
The company has been fixing its Japanese yen floating rate borrowings through various hedging structures. “We don’t see any impact on the REC’s servicing cost or funding of projects,” it said.
The exchange rate between the US dollar and yen fluctuated over the past week. From around 155 on July 30, the yen surged to seven-month high — 141.675 per dollar at some point — on Monday, amid fears of a serious US economic downturn and bigger rate cuts by the Federal Reserve. As such, the dollar index fell below the psychologically crucial 103 level in Asian trade on Monday.
Out of REC’s portfolio of ~ $16.6 billion equivalent of foreign currency borrowings, nearly $2.9 billion equivalent (18%) is on JPY underlying. “These debts as being hedged completely for principal there is no impact on REC’s cost in relation to JPY debt,” said the company.
State-owned NBFC in the renewable energy sector Indian Renewable Energy Development Agency (IREDA) also sees no impact of the increased rates by the Bank of Japan on its foreign currency borrowing going ahead. However, the NBFC will consider foreign borrowing only if the landed cost of the fund is cheaper than the domestic market, according to the company’s chairman and managing director Pradip Kumar Das.
Analysts however note that the debt costs of India’s NBFCs would continue to be elevated, given that the Reserve Bank of India is seen to delay the rate cut cycle.
