Rising Interest Rates Set to Make ECB Route Unviable

1. Rising Interest Rates Set to Make ECB Route Unviable
The government’s move to widen the scope of external commercial borrowing to let the
debt-laden telecom and aviation companies raise funds overseas may be too little and too
late as rising global interest rates will make borrowing in US dollars unviable.
The government’s bid to arrest the fall of the rupee, which has plunged to life lows, may
come a cropper given that yields across the board, including that of US treasuries, have
risen more than a percentage point in the past two months. Foreign portfolio flows in both
equities and debt have turned negative after nearly a year of inflows, deteriorating the
outlook on the rupee and boosting the cost of hedging. These factors make borrowing in
Indian rupee cheaper.
For a triple a rated company, a US dollar loan may now cost more than 10%, given the
market interest rate and hedging costs. That makes borrowing in Indian Rupees cheaper.
Policy makers are leaving no stone unturned to bring in US dollar flows following the 11%
fall of the rupee since May. Foreign portfolio flow into debt and equity, which helped fund
the record current account deficit, is reversing.
Overseas funds sold a net $1.76 billion of stocks in June, the highest since they pulled out
$2.1 billion in August 2011. They sold bonds worth $5.4 billion in June. With the Federal
Reserve poised to taper bond purchases by the end of the year, interest rates are
climbing. Former Goldman Sachs economist Jim O’ Neil forecasts the yield on benchmark
10-year US treasuries to rise to 4% from 2.5% now. In fiscal 2012-13, ECBs formed the
largest chunk of India’s external debt. Indian companies borrowed $121 billion through the
ECB route.
“For higher rated Corporates, borrowing in rupee terms is now much cheaper than
borrowing overseas, given the hedging costs,” said Randhir Singh, managing director and
India head, financing, Deutsche Bank. “Credit spreads on foreign currency borrowings
have gone up significantly in the last two weeks.”

2. According to RBI norms, companies cannot pay more than LIBOR plus 500 basis points
for an external commercial borrowing. According to bankers, it may be difficult for
companies to raise ECBs within these norms. On Friday, US mortgage rates jumped to a
two-year high. According to Bloomberg data, the rate on 30-year loan rose from 3.93% to
4.46% in a week, a rise not seen in 26 years.
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