Companies with foreign debt likely to feel the heat when US hikes rate
DOLLAR DOLDRUMS
MUMBAI: It is something that most Indian companies always feared. Their concerns turned a notch starker on Tuesday when IMF MD Christine Lagarde cautioned companies to brace for an adverse impact of US interest rate hike.
The caution was in line with numbers. In her speech at the RBI headquarters in Mumbai, Lagarde said India’s corporate sector debt nearly doubled to $120 billion in five years, as companies rushed to borrow money abroad, which was cheaper than that available locally.
Also, Indian firms have raised about $19 billion so far through foreign borrowings this year, and are expected to borrow more next year when reforms kick in.
Since the borrowing is in dollars, it is expected that once the greenback appreciates in value after the Federal Reserve raises interest rates, sometime in June, companies’ debt will also surge, affecting their profitability and market valuations.
“We are living in a world of dollar appreciation,” said Manishi Raychaudhuri of BNP Paribas. “The last six to seven months of dollar appreciation is one of the sharpest in recent history. As the Fed’s dollar printing is over and the supply of other currencies (such as the yen and the euro) is being increased, it is obvious the dollar will likely appreciate over the foreseeable time horizon.” The dollar has risen 20% against major currencies over the past year.
Finance heads, however, said most companies either have a natural hedge — they export their products and are hence able to cover the fluctuations — or limit the borrowing to fund overseas operations alone. Large exporters including software, pharma and automotive companies have large operations overseas and can raise debt and pay expenses in dollars.
“Companies that borrow in dollars without hedging, will find it difficult once dollar goes up. In our case, our foreign debt is exclusively for our foreign operations,” said Koushik Chatterjee, group executive director (finance and corporate) at Tata Steel.
On Wednesday, the rupee closed at 62.69 against the dollar, a gain of 1 paise. Currency analysts said that while the rupee has been stable, if the US raises rates, the rupee might fall below 63. If the economy is resilient, forex reserves strong and growth estimates robust, the currency will be able to counter the dollar, analysts said. TOMORROW: THE DOMINO EFFECT OF A RISING DOLLAR