Firms face rupee challenge as they face huge foreign debt

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.”