Rupee’s next sore spot: $79 billion in unhedged offshore loans

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Indian companies are rushing to hedge their overseas dollar debt against further declines in the rupee, a process that threatens to translate into further losses for the battered local currency.

Firms in the country had $79 billion in uncovered offshore loans at the end of March, or about 44% of their total overseas borrowing, according to the latest data from the Reserve Bank of India. The cost of repayment has skyrocketed as the rupee has fallen over 7% this year.

“We have seen increased activity by companies to hedge their dollar exposure since USD/INR broke through the 79 mark,” said Parul Mittal Sinha, head of Indian financial markets at Standard Chartered Plc in Mumbai. “The proportion hedged in dollars is expected to increase in the current risk environment, increasing the demand for dollars.”

Read also | Rupee depreciates against US dollar less than other major currencies: CEA

The proportion of unhedged foreign loans piled up as companies were lulled into complacency over their dollar exposure by the intervention of RBI, which ensured the rupiah was less volatile than its emerging market peers. In recent months, however, equity outflows and general dollar strength have seen the currency’s losses accelerate and send it to a series of record lows.

While companies are starting to increase hedging levels, the current proportion remains well below the 63% minimum recommended for periods of high currency volatility, according to central bank research.

The rupee slipped to a new all-time low of 80.0638 to the dollar on Thursday and lost 2.4% over the past month, the third worst performing Asian currency over the period. Global funds have sold $29.5 billion worth of Indian stocks this year, on course for a record annual outflow, according to data compiled by Bloomberg Data from 1999.


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The increased demand for hedging by Indian companies is evident in rising dollar term premiums and the process is set to become a key source of rupee depreciation pressure, according to Citigroup Inc.

“External debt holders are likely to refinance their debt or repay from foreign currency revenue sources,” Citi economists Samiran Chakraborty and Baqar Zaidi wrote in a research note this month. “That said, increasingly aggressive US Fed tightening could increase the cost of external financing and, together with a squeeze in global liquidity, could pose challenges to the significant refinancing of external debt due this year.”

Citibank lowered its 12-month forecast for the rupee to 81 to the dollar from an earlier forecast of 79, the economists said.

Cheaper financing

An alternative to hedging foreign borrowing is to ditch dollar financing altogether and look for cheaper domestic options.

ReNew Energy Global, one of India’s leading green energy companies, recently refinanced $525 million of its dollar-denominated bonds with longer-term rupee financing.

“The company’s broader policy is to hedge forex exposure as the need arises to protect currency and interest rate risk,” said ReNew’s chief financial officer. Power, Kedar Upadhye, in an interview last week.

JSW Steel Ltd., which issued dollar bonds last year, also said it intended to focus more on the domestic fund market this year.

“Indian interest rates are much better compared to what we have to pay if we are to raise funds in international markets,” said Seshagiri Rao, the company’s joint managing director in Mumbai. “We borrowed overseas last year, and this year we will focus on the domestic market.”


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