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C. Shivkumar

Global interest rates show signs of hardening

Bangalore June 21 With global interest rates showing signs of hardening, external commercial borrowings (ECBs) are beginning to become more expensive.

Bankers said they have already cautioned some of the intending external commercial borrowers to hedge their open positions.

Most international borrowings are currently linked to the London Inter Bank Offered Rate (LIBOR). Six-month LIBOR is currently 5.5 per cent. Inclusive of swap and hedging costs, the effective rates were currently in the region of about 9 per cent. This was assuming that corporates were borrowing at rates of about 100 basis points over LIBOR.

The bankers said that indications of a potential hardening of rates were available from the recent hardening of US Treasury yields. The 10-year US Treasury has moved up to 5.2 per cent now from 4.6 per cent in March end, a 0.6 percentage point increase. They said that this trend was likely to continue.

Firming of international dollar yields was triggered by China's sale of US Treasuries as a move to reshuffle its $1.2-billion dollar holdings of exchange reserves.

China's international reserves are mostly invested in US Treasuries, and long-term bonds.

According to data from the US Treasury Department, China and Hong Kong together sold close to about $7 billion between March and April this year.

India's holdings of US Treasuries on the other hand remained constant at $20 billion for the same period, according to the data. This sell off was leading to a hardening of dollar yields, the bankers said.

The rising yields notwithstanding, India Inc's interest in ECBs stemmed from the advantageous interest rate situation, the bankers said. Currently, ECBs despite rising yields were still cheaper than comparable domestic borrowings by at least 2.5 to 3 per cent.

Domestic corporates as a result had borrowed a little over $5 billion to fund their rupee expenditure till March 2007. The ECB flows have continued well into this year and medium rung companies have also begun exploring the option of tapping foreign currency borrowings.

Low forward premia

Besides, the current low forward premia regime is also driving ECB interest. Six-month forward premia is just about 3 per cent. This had gone as high as 8 per cent in April at the peak of the tight liquidity situation. Low premia was also driven by inflows for the public offerings, including private sector ICICI Bank.

ICICI Bank's public issue has so far netted bids in excess of Rs 25,000 crore.

These flows along with funds from other capital investors, including foreign portfolio investors, prompted a heavy intervention by the Reserve Bank of India in the foreign exchange markets. The intervention and the consequent liquidity resulted in pushing down the yield at the 91-day Treasury bill auctions down to 7.18 per cent at Wednesday's (June 20) auctions down 60 basis points over the previous week. This situation could yet reverse, the bankers said, once the refunds on the public issue starts and advance tax payments are completed.

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