The Reserve Bank of India (RBI) deputy governor SS Mundra on Monday indicated that with a turnaround in the interest rate cycle in developed economies, unhedged forex exposures of Indian companies is a matter of concern.
“Because of the quantitative easing and easy monetary policy which was being pursued by the developed economies in the last two years, there was abundance of cheap credit available, and I think many corporates have moved to convert their domestic currency borrowing into forex borrowing without caring to really hedge for it,” he said at a banking roundtable organised by the Welingkar Institute of Management and Development Research.
Interest rates in the United States have remained at record low levels since 2009 which led to cheaper borrowings in dollar. It is believed that many of these foreign currency borrowings by Indian companies have been kept unhedged with an aim to keep the costs low. Besides, there have been expectations that easy monetary policy
is likely to continue for some time.
However, the United States Federal Reserve has been continuously indicating a possible rate hike in its December policy meet, which will conclude on December 16. “Now, when it is looking that the interest rate cycle is about to turn, it would have its own implication on the exchange rate, currency valuation.” Mundra said.
The deputy governor observed that consolidation in the banking sector was possible but said it has to be a focussed exercise. He said that a merger should either achieve a geographical integration or should enhance the product range.
Mundra also asserted on the importance of the bankruptcy code, and said it would be the most efficient option compared to many measures introduced by the central bank.
“In the past few months, the RBI has introduced a host of measures—the 5/25 scheme, the JLF and the SDR. But these are all the second-best options. The most efficient option would be to have an effective bankruptcy code, which we do not have,” he added.
He also elaborated on the need to have a good mix of different growth models and said that focussing on just a single model would not be the right way.
“There are two phases in the life of any country. One you invest in infrastructure to the point it is capable of generating a real rate of return. So then it becomes a viable economic activity. Then, a stage comes when you just keep on investing in infrastructure for the sake of investment to keep the economic engine going. And at that point of time, it stops giving the real rate of returns,” he said.
Mundra pointed out that at such a point, it will not remain a sustainable investment and will have an adverse impact on the banking system.
“Because if this investment is done by borrowing from the banking system, and it is not providing a real rate of return, then there would be issues around repaying the banks then there would be asset quality issues,” he added.