The Telegraph
Since 1st March, 1999
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Weaker rupee slows rush for foreign loans

Mumbai, Sept. 18: The decline in the value of the rupee, coupled with the increase in forward premia on the dollar, is likely to prompt companies to slam the brakes on their drive to raise foreign currency (forex) loans.

In the recent past, several firms had started mopping up cheaper funds via external commercial borrowings (ECBs), encouraged by the rupee’s appreciation against the dollar and the drop in forward premiums that brought down the cost of hedging.

In the first half of calendar year 2003, India Inc brought home over $1 billion through ECBs. While IPCL and Gujarat Ambuja did so at attractive rates, reports last month said Tata Sons, the holding company of the Tata group, and HDFC were looking at this option.

However, observers now say that with forward premia on the dollar inching up and the rupee expected to remain under pressure, those planning to go shopping for funds overseas will drop the idea for now.

“As premia on the dollar appreciates, this may not be the right time for ECBs given that the cost of raising funds go up,” an analyst from a local firm pointed out. The six-month forward premia ended at 1.24 per cent today, an increase from 1.01 per cent on Wednesday.

ECBs are available at a coupon of over 100 basis points above the London Inter-Bank Offered Rate (Libor). In addition, they have to hedge against currency risks.

Sources said one of the major reasons for the popularity of ECBs among large companies is that funds can be raised at cheaper rates far lower than those at home. For instance, a clutch of companies had managed to borrow abroad at less than 5 per cent in July, lower than 7 per cent, the going rate in the country.

Some firms still see a charm in ECBs. One of them is Jindal Steel and Power, the sponge iron major from the P Jindal group, that is looking to tie up external loans at attractive rates to finance its expansion programme.

It is typically the second-rung companies that still find foreign borrowings to be a cost-effective option. “These loans are at least 3 percentage points cheaper than money raised from domestic sources. We can get ECBs around 6 per cent, while the cost of funds at home is ruling around 9 per cent,” an executive said.

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