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C. Shivkumar

Bangalore, Oct 1 With the rupee appreciating nearly 8 per cent since the beginning of this financial year, importers have now quietly started leaving their exposures open.

Bankers said that along with the importers, corporates with external commercial borrowings have also begun reversing their hedges on debt service payments. Bankers said that the reversal in hedges, implying cancellation of maturing forward covers, was done to take advantage of the current exchange rate of the rupee-dollar and rupee-euro exposures. Currently, the exchange rate against the dollar is Rs 39.75 and the euro Rs 56.63. At the beginning of this year, the rates were Rs 43.13 and Rs 57.64 respectively.

Bankers said that most importers/corporates have taken the position of a rupee appreciation in the coming weeks.

This position was taken on the basis of the current trends in capital flows and expectations of a further reduction in U S interest rates when the Federal Reserve Bank’s FOMC (Federal Open Market Committee) meets this month end.

At the last FOMC meeting on September 18, the Federal Funds rate (the rate at which inter-bank reserve funds are borrowed) was dropped 50 basis points.

This was a trigger for deluge of capital inflows into the country. But the FOMC intervention reduced interest costs for ECBs. ECBs are mostly raised at spreads over the London Interbank Offered Rate (LIBOR). Six month LIBOR that was 5.42 per cent on September 18 is now 4.04 per cent.

Bankers said that though they routinely advised against open exposures, importers and corporates with external currency liabilities have made the shift.

In fact, corporates planning to take advantage of the Reserve Bank of India’s enhanced limits for prepaying their liabilities are also leaving their positions open.

The cancellation of the hedges and inflows have resulted in forward premia against the dollar plunging to under one per cent at the end of September from the beginning of this year.

The reduced LIBOR and the dollar depreciation put corporates with ECB exposures at an advantage.

During the first quarter of the current year alone, ECBs were $48.3 billion or an increase of $5.9 billion over the corresponding period of the last year. Corporate India’s debt equity ratios have shrunk as a result of the exchange rate and the reduced LIBOR.

The ratios are estimated at about barely 1:1. For most top rated corporates, the available spreads are barely 100 basis points over six month LIBOR.

Besides, the debt service coverage ratio (the ratio calculates the amount of cash available to meet debt obligations and specifies payments as a part of the net operating revenues).

Ideally, the preferred DSCR by banks and financial institutions is 1.5 times the net operating revenues, though some foreign lending institutions have extended ECBs even at ratios of 1.25 times in the past.

For most borrowers, the DSCRs were well above the stipulated 1.5 per cent and actually between 1.75 and 2, reflecting the comfortable situation. Despite this favourable situation, there are few takers for ECBs currently.

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