Spectre of unhedged exposure looms as firms’ forex loans jump 22% in FY15

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Published: July 1, 2015 12:21:42 AM

Amid rising concerns over the Greece crisis, the 21.6% jump in Indian companies' forex borrowings and the fact that bulk of the stock of $181.9 billion of commercial borrowings is unhedged should worry the Reserve Bank of India.

Amid rising concerns over the Greece crisis, the 21.6% jump in Indian companies’ forex borrowings and the fact that bulk of the stock of $181.9 billion of commercial borrowings is unhedged should worry the Reserve Bank of India.
Data from the central bank showed on Tuesday that commercial borrowings stood at $181.9 billion as of March 2015, an increase of 21.6% from $149.5 billion a year ago. This increase was the prime reason for the rise in external debt.

In 2013, companies had suffered big hits due to their unhedged forex as the rupee plummeted to all-time lows in the aftermath of the US Federal Reserve indicating that it would begin rolling back its accomodative monetary policy stance.

After two years, the Fed is again at the centre of volatility in currency markets as it readies to hike interest rates after a gap of nine years. Along with that, the turmoil surrounding Greece’s possible default on its debt has infused further volatility in currency markets.

forex

A weakening currency puts the forex loan of an Indian company at risk as the payouts increase for the borrower. However, the rupee has been fairly stable compared with the massive depreciation episode of 2013. The currency is moving in 62-64/$ band for the last six months. On Tuesday, the rupee ended at 63.65/$, down 0.32% from Monday’s close.

While the stability of the currency has largely been due to RBI interventions, it has made companies complacent in hedging their exposures. According to RBI deputy governor HR Khan, the hedge ratio was a measly 15% as of August 2014. According to bankers, it has not improved materially over time.

The country’s overall indebtness to the world increased at the slowest pace in six years even as its companies increased their offshore borrowing in 2014-15.

Reflecting the improvement in India’s balance of payments, the country’s external debt grew 6.6%, the slowest pace in six years, to $475.8 billion as of March 2015, data from the Reserve bank of India showed.

Short-term debt as a percentage of total debt also slipped to 17.8% for 2014-15 from 20.5% in the previous year. Short-term debt by original maturity stood at $84.7 billion, down from $91.67 billion a year ago.

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