Firms face Re challenge as they face huge foreign debt

Firms face rupee challenge as they face huge foreign debt

Representative image. (iStock Photo)

By Anurag Joshi

The Indian rupee has declined about 2.5% against the dollar this month despite rebounding Tuesday. That broader weakness couldn’t come at a worse time for the nation’s companies facing a record international debt bill.

The spread of the coronavirus has caused historic declines in asset prices globally, with investors increasingly bracing for a global recession and a jump in corporate defaults. Indian borrowers had been loading up on foreign currency-denominated debt amid a squeeze in rupee credit markets, and have to repay $7.5 billion of overseas bonds and loans in the April-June period, the most ever in a quarter.

With only limited currency hedges, a weakening rupee means that the burden of such redemptions will increase at a time when a drop in global demand is hurting corporate cash flows and investors are shunning risk. Indian firms have hedged only about 30-40% of their outstanding offshore debt, according to risk advisory firm QuantArt Market Solutions.

The Reserve Bank of India had eased hedging requirements for foreign-currency borrowings by local firms in late 2018, giving India Inc. leeway to go on a record offshore debt binge.

“Indian companies are in a tight spot as a lot of debt repayments are due this year,” according to Srinivas Puni, a director with QuantArt. “The stability of the rupee over the past three quarters had created some complacency in hedging foreign-currency payables.”

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