ECBs jump massive 92% in five years, but largely unhedged
Dollar borrowings of Indian companies are rising and much of these are still unhedged, peculiarly due to the Reserve Bank of India’s aggressive interventions in the foreign exchange market.
External commercial borrowings (ECBs) of companies have jumped a massive 92% over the past five years to an outstanding $170.8 billion as of December 2014. At this level, ECBs formed 37% of the total external debt of the country, higher than 31.6% share in March 2011.
To be fair, not all ECBs are channeled for onshore spending and, therefore, a part of the stockpile may not require hedging. However, to the extent ECB funds are brought back for rupee spending, hedge ratios are ultra low even now because of the expectations of a stable rupee going ahead, according to bankers.
In October 2014, RBI deputy governor HR Khan had pegged the hedge ratio at a measly 15% and bankers say that hedges haven’t been improving ever since.
“Companies that have board approved policies, they continue to play safe. But there are others who don’t,” said Hitendra Dave, head of global markets at HSBC.
While the RBI is intervening to curb volatility and preserve the competitiveness of the currency, this is invariably keeping corporates off hedging by jacking up premiums.
“One common refrain one hears from importers and corporates who borrow in foreign currency is that the cost of buying forward foreign currency is just too high,” said Ananth Narayan G, regional head of financial markets for South Asia at Standard Chartered Bank.
He notes that the central bank has not only been buying forward dollars, but also rolling its positions by paying premiums, thereby jacking up dollar/rupee forward rates. Narayan estimates that the RBI bought incrementally $39.5 billion in the forward market in 2014.
Given the rise in premiums, most importers are keeping positions unhedged and the very few that hedge are doing only up to three months. “It is costly, so most importers eventually end up covering short tenure,” said Ashish Parthasarthy, head of treasury at HDFC Bank.
Last week, RBI governor Raghuram Rajan warned companies that the central bank would not be bailing them out during sharp currency movements. “Our focus is on undue increases in volatility, but we are not going to maintain any particular level for the rupee and so they have to recognise that they are taking on a big risk, especially if monetary conditions change around the world,” Rajan said on April 7.
The central bank has tried to push for hedging by asking banks to set aside higher capital against unhedged exposure of their clients. Despite efforts, the central bank’s displeasure is clear. “You can take the horse to the water, but you cannot make it drink,” Rajan had said.
This rising unhedged dollar indebtness of Indian companies comes at a time when a committee headed by former Sebi member MS Sahoo has recommended removing all restrictions on ECBs. The committee has said that a certain level of hedging must be made mandatory. Clearly, it is time for corporates to heed the RBI’s warning if they want more freedom to borrow dollars.