$50-billion debt shadow over rupee

RBI may have to provide support worth $70 bn, say experts

MUMBAI: As much as $50.46 billion of external debt —- equivalent to nearly a quarter of India’s forex reserves —- is due to mature over the next 8 months.

That potential outflow could add immense pressure on the already hammered rupee in the short term, experts said.

But the $273.88 billion of foreign exchange reserves could act as a buffer, and the Reserve Bank of India (RBI) could use it to facilitate the process of repayments, they said.

Data released by RBI in June this year show $43.66 billion of short-term debt maturing by June 2009.

Short-term debt is predominantly trade credit, including buyer’s credit, or guarantees given by foreign banks to their Indian counterparts and used by Indian importers and exporters.

Additionally, commercial borrowings (ECBs and foreign currency convertible bonds) worth $6.8 billion will also mature by June next.

Economists said in normal times, a majority of these debts would get rolled over.
But these are abnormal times, so there is a risk foreign banks won’t roll over the credit limits and Indian banks will have to pay up.

Noted forex expert A V Rajwade said RBI will have to provide rupee liquidity to banks and also supply dollars to the foreign exchange market over the next few months to facilitate settlements.

“The $43.66 billion in short-term debt maturities is understated. RBI will have to provide support worth $70 billion or Rs 300,000 crore,” he told DNA Money.
This would require a massive restructuring of RBI’s overall assets as forex holdings would go down by that amount and there would be a corresponding increase in rupee assets, he said.

To complicate matters, there are also the short-term money market borrowings of Indian banks’ foreign branches.

These liabilities may also have to be refinanced from India in order to prevent defaults, Rajwade said.

However, he said the RBI is capable of managing the situation.
An economist with a private sector bank, who did not want to be named, said $23 billion of trade credits will mature in the next six months and because of increasing counterparty risk abroad, these guarantees may not be rolled over.

“In that case, Indian importers may have to directly buy dollars from the market. Debt is not available worldwide and line of credits for emerging markets are not being accepted,” he said.

Already, central banks in emerging markets like Korea, Brazil and to some extent, Russia, are extending credit lines to bank to pay that debt.

Economists say India is also facing a similar problem and the RBI may also have to use similar “unconventional” measures to tackle this risk.

An economist with a US bank in India, who did not wish to be named, said the freezing of global credit is a problem, but added that RBI’s recent moves suggest the central bank has already taken steps to address them.

He said the move in last week’s monetary policy review —- the ceiling for trade credit of less than 3 years was raised to 6-month Libor plus 200 basis points from 6-month Libor plus 100 basis points —- was a case in point.

“These credits are a concern, but RBI has taken steps and has the tools to manage the situation. They are willing to act as the Libor move in the policy showed,” he said.
Arvind Sonmale, managing director and CEO, Global Trade Finance, said fears that the debts will not be rolled over are exaggerated because there are still eight months to go for the maturities.

“If at all there will be an issue it will be related to pricing of trade credit. Banks may demand a higher price. India is one of the highest short term rated countries in the world. We have huge reserves, strong growth and a well regulated banking system which will ensure that our obligations are met,” he said.

Economists said there will certainly be pressure on the rupee, but how much the currency falls from the current levels will depend on RBI’s “style and amount of intervention” in the forex market.

Vikas Agarwal, fixed income and forex strategist at JP Morgan, said he is becoming “less bearish” on the rupee over the next six months.

“Lower current account deficit due to cooling of oil prices will boost the rupee. Outflows also will also moderate to a large extent,” he said.

For the next one month, however, the rupee would continue to be under pressure, he said.