The Hindu Business Line : ‘ Profits to be hit; interest expenses may go up’

The curbs on external commercial borrowings (ECBs) announced by the Finance Ministry have wide repercussions on the system. Who is going to be affected? Who would benefit? Will domestic interest rates move up?

Mr Moses Harding, Executive Vice-President and Head, Wholesale Banking Group, IndusInd Bank, responds to a couple of questions from Business Line on the impact of these moves.

How will the curbs on ECBs affect the Indian companies borrowing abroad?

Indian companies were benefiting in many ways by accessing offshore market for their funding requirements. Even on a fully hedged basis, there was a couple of percentage points arbitrage vis-À-vis cost of rupee funds.

Moreover, raising rupee funds in the domestic market on a long-term basis for period over 3 years is not only difficult but also not cost- efficient.

The benefits for companies who have a strong Treasury team (to manage resultant exchange/interest rate risks by running unhedged positions or accessing low-cost Japanese Yen funds) are huge given the rupee appreciation.

The curbs on ECB will definitely increase the interest expenses for companies and the profitability, not taking into account the other income that the companies were generating through proactive risk management, encashing the short and medium term moves of currencies.

Which sectors could be most affected?

The most affected will be large/medium corporate entities that were able to raise large sums of money at cheaper cost.

The sectors that need long-term project financing — like infrastructure, real estate, manufacturing units undergoing capacity expansion etc — will be the worst hit.

Overall, the impact will be across all sectors that were using the ECB route as an interest arbitrage to replace rupee term loans with foreign currency loans.

Will domestic lending pick up and do you therefore expect a rise in interest rates?

The pressure on rupee credit is bound to increase, as the access to offshore market is greatly restricted now. However, I do not see a great impact on short-term interest rates, say up to 1 year.

We also should take into account that banks do not have a liability profile beyond 1 year, which should push lending rates beyond 1 year.

This would mean that the “spread” between 1 year and beyond would increase, thus steepening the yield curve.

The higher demand for rupee credit is bound to put inflationary pressure in the system, which should be controlled through higher interest rates. Hence, there is a strong case for stable to high interest rate regime in the shorter end up to 1 year and higher interest rates beyond 1-year tenor.

Do you think this step will help arrest the rise of the rupee?

The RBI is taking all measures to “bridge” the demand/supply gap of foreign currency flows in the system.

We have seen measures rolled out to accelerate foreign currency outflows from India to offshore market for investments.

Now, curbing access to foreign currency funds is to reduce foreign currency supplies into the system.

However, this has not resulted in rupee depreciation in the short-term given the robust inflows into the capital market.

Having taken these tough measures, fundamental factors should play sooner than later to guide the rupee to 41.50-42.00 levels within the next couple of months.

Now is the time to hedge import payables across all tenors and exporters to run unhedged positions, which will enable demand outweighing the supplies to guide rupee depreciation.

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‘ Profits to be hit; interest expenses may go up’