Effect of Rupee fall on Indian Economy and Corporate Fundraising in 2018-19

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The diminishing value of rupee has posed risk to ECB (external commercial borrowing), a way to raise money as the borrowing cost increases.It may be a good news for domestic money lenders and also banks can remove the loan baggage and improve the situation.

Raising funds from ECB is an favourite option among companies with lower interest rates and simplification of ECB norms by RBI (Reserve Bank of India). As per the RBI data, total ECB registrations are satisfactorily increased in the first 3 months of financial year 2019 as compared to the corresponding months of last year.

In this year, the value of rupee has reduced nearly by 10% and currently is 70.15 against dollar. As the value of rupee reduces, it increases the hedging costs and thus reduces the profits of borrowing from external markets.

The 3 months annualized hedging premium has raised from 3.97% in April, 2018 to 4.09% in May to 4.34% in June and 4.48% in July 2018 as informed by Anil Gupta, vice-president, sector head-financial sector ratings, Icra Ltd.He said that due to the declining rupee, cost of hedging are increasing for last few months, will result in growth of borrowing costs for Indian firms apart from the increase in international interest rates.As the currency risks are borne by the investors, the issues like rupee denominated ECBs or Masala bond may get hit in near future.This reducing rupee may require companies to check out for other options to fulfil their cash requirements.

Madan Sabnavis, chief economist of Care Ratings Ltd, expects India Inc. to move again to banks which has been the traditional way to get funds. He stated that the bank credit has been increased as compared to the market where the profits rise with the increase in RBI rates and people many prefer banks as the increase in rates is slow there. He also added that as per the July data from RBI, commercial paper volumes increased to 96% on yearly basis.This increase in volume is not bearable and therefore they expect to shift some part of this to bonds that could result in increased bond issuance during second-half of the financial year 2019.

Demands in domestic sources for funds may be increased due to weakening rupee and up surging interest rates whereas the ECBs may lose some steam in the near future.

 

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