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FCCB-laden India Inc catches the falling knife

For India Inc, carrying a heavy foreign debt in the form of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs), the fall of the rupee is another big worry.

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For India Inc, carrying a heavy foreign debt in the form of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs), the fall of the rupee is another big worry.

Though most companies may have hedged their foreign currency exposure, there is disquiet in the market.

Total ECBs that companies were planning to raise in May 2018 were pegged at around $3.78 billion. But most of these are longer tenure loans or bonds to meet their working capital needs, import of machinery and most often used to refinance the rupee loans.

Ritesh Bhansali, assistant vice president-forex risk consulting, Mecklai Financial, said, "The lower rupee will increase the rupee liabilities of Indian companies. If their positions are not hedged, it could create problems with their cash flows."

Most prudent corporate bodies in the country hedge their foreign currency exposure, said Hemant Kanoria, managing director, Srei Infrastructure Finance Ltd.

"As Indian rupee continues to fall, for us it is not making much of a difference as our exposure is fully hedged," Kanoria said.

But with the depreciating currency, the risk premiums and hedging costs for Indian firms have increased in recent months, thereby constraining their ability to raise ECBs.

Earlier in April, Reserve Bank of India (RBI) relaxed norms for ECBs, particularly the increase in the all-in-cost ceiling to 450 basis points (bps) over benchmark from the earlier 300 bps which removed some of the constraints for domestic firms to raise foreign funds.

Companies that would be least impacted are those who takes loans in foreign currency, but also export, thus creating a natural hedge for their exposure.

"Things would be difficult for those companies who take loans from the ECB or FCCB route, but sell in the domestic market with no foreign exchange earnings," Kanoria said.

Then there are companies like McLeod Russel, owning overseas tea estates and exporting tea as well, having trade payables in pound, which would go up due to depreciation of rupee.

For the company, a 10% appreciation or depreciation of the respective foreign currencies with respect to rupee holding all other variables constant, would result in an increase or decrease in the company's profit before tax by approximately Rs 9.66 lakh for financial assets and decrease or increase in the profit before tax by approximately Rs 32.63 lakh for financial liabilities, McLeod Russel disclosed in its 2016-17 annual report.

"Srei uses statistical measures like Value at Risk (VaR) method, stress tests, back tests and scenario analysis and continuously monitors the market movements to effectively manage the exchange rate risk," the company's recent annual report said.

For Srei, out of its total foreign currency loan of Rs 184.72 crore as on March 2018, it has to repay about Rs 40.35 crore within a year's time.

Ananth Narayan, professor, finance SPJIMR, said India has a problem of a deteriorating current account alongside some capital outflows leaving people with open exposures nervous.

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