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The rupee's stability in the last 12 to 18 months made corporates reduce hedging
Indian companies’ foreign currency debt has crossed Rs 4.5-lakh crore in 2014-15, a large portion of which remains un-hedged giving fresh headache to their investors and the Reserve Bank of India (RBI). The rupee has been hovering around 63-64 level against the US dollar.
As per India Ratings' study of corporate balance sheet available for 500 largest listed borrowers in 2013-14, aggregate debt increased to Rs 28.7 lakh crore, out of which about Rs 4.5-lakh crore is dollar denominated debt compared to Rs 4.2 lakh crore in the year ago period.
"In the last 12 to 18 months rupee's stability made some of the corporate houses assume that Indian currency will remain stable and they reduced the hedging throwing caution to the wind," says Deep N Mukherjee, senior director at India Ratings & Research.
“The risk is that the rupee may touch 65 during the course of this year. There are global risks which includes the US Fed's outlook on tightening, how the situation pans out in the eurozone and whether China's growth slows down further,” said Anindya Banerjee, currency analyst, Kotak Securities.
For companies with non-investment grade, borrowing cost for these dollar debts varied from 8 to 10 per cent depending on tenure and with additional 5-6 per cent cost for hedging this became completely unattractive vis-a-vis domestic borrowing. Hence these companies kept their exposure largely un-hedged.
"So currently, these corporates are more vulnerable to any external currency shock that may happen due to rise in US interest rates. Since a large number of corporates may be affected, an external currency shock may push back India’s recovery by a good 18-24 months," says Mukherjee.
The RBI in its financial stability report released last month highlighted the problem, "Given muted expected global growth and the possible lower trend in capital inflows following the anticipated increase in policy rates in the US, risks emanate from uncertainties in crude oil prices as well as from lower exports. Further possible adverse exchange rate movement arising out of financial market volatility may negatively affect corporates with unhedged foreign exchange exposures and may have implications for financial stability," the RBI said.
A survey by Bank of America Merrill Lynch pointed out that despite the RBI nudging the corporate houses to be hedged in order to seek protection from rupee volatility, there are several companies that are under-hedged. Out of the Indian CFOs surveyed, two-third of them said that they have a significant exposure to the US dollar but only 53 per cent said they are hedged against currency volatility.
This survey included the view of 630 respondents across Asia Pacific region out of which 75 were from India. The Indian CFOs were from companies with revenues of over $1 billion.
Kavish Arora, managing director & head of banking at Bank of America Merrill Lynch India says, “Some of the corporate that we spoke to said that they are planning to hedge but they are just delaying the process with the cost in view. With the positive sentiments in the economy, they are hoping that rupee may strengthen and then they can hedge.”
Utility and infrastructure companies who earn in rupee but have borrowing in dollar are especially sensitive to rupee depreciation. "The companies with term loans will face immediate pressure with rupee depreciation as they have amortized repayments every year along with the interest payment costs," says ," says Vikas Halan, vice president, corporate finance group, Moody's Investors Services.
