InvestorQ : Why are Indian companies now shifting from dollar borrowings to rupee borrowings?
Moii Chavate made post

Why are Indian companies now shifting from dollar borrowings to rupee borrowings?

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Tisha Malhotra answered.
4 weeks ago
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There is a subtle shift happening in the borrowing markets. Less than 2 years ago, Indian companies were rushing to raise money in dollars. The reasons were obviously. Dollar borrowings rates were awfully low and the rupee was relatively stable against the dollar. There was really nothing to worry. Companies could borrow at low rates of interest and the currency risk was also limited due to the stability of the rupee. It was a case of heads I win and tails I don’t lose. Things have change sharply since the start of 2022. The rupee cracked from about Rs76/$ to Rs83/$ and the cost of borrowings in US dollars spiked.

Now the borrowing cost in dollars has components. The first is the interest rate paid on the dollar borrowings. The second is the hedging cost that is a function of the volatility of the dollar. Today, both have gone up. With the Fed hiking rates by 375 bps, the cost of borrowing in dollars has gone up. At the same time, forex volatility has also made dollar hedging very expensive. The indications are that the cost of borrowing in dollars today is nearly 65 basis points or 0.65% more than the cost of rupee borrowings. This is the all inclusive cost factoring in the hedging coast also. Rupee loans are way cheaper.

The gap in a 1-year dollar loan is around 65-70 basis points (bps). However, that reduces as you go up the tenure and almost goes as low as 10 bps, which is more due to the inverted US yield curve. The demand for dollar loans was, apparently, very strong in the first half of the year, but things changed once the rate cycle gathered momentum. Indian companies raised ECBs of $22.87 billion between January 2022 and August 2022; which is lower by 13% compared to $26.3 billion in the corresponding period of 2021. With more hawkishness, this gap will only become more pronounced.

However, it is not just about the relative dollar rupee costs that rupee loans are more attractive. For instance, there is an increase in credit spreads in offshore markets in recent months which has enhanced hedging costs. That has made dollar loans less attractive for corporates. Hence, borrowers are turning to the domestic markets. Additionally, the Indian banks are becoming smarter and savvier in going out of the way to work out a good deal for high rated borrowers. But there is still going to be demand for dollar loans from NBFCs and infrastructure, where the domestic appetite is not so high.

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