The Hindu Business Line : Lower Fed rates may help cos with dollar liabilities

Bangalore, March 19 For India Inc, the reduction in the Federal Funds rate brings good cheer. At least for those companies that already have large external debt servicing liabilities.

The US Federal Reserve brought down the key Federal Funds rate by 75 basis points down to 2.25 per cent.

This is the rate at which overnight reserve funds are borrowed and lent among banks and savings institutions in the US.

The reduction and the increase in the repayment period from the Feds discount window to 90 days from 30 days signalled lower rates.

Six-month London Inter-bank offered rates (LIBOR) were down to 2.55 per cent. This translated into a bonus to Indian corporates with dollar liabilities.

Many had raised the funds at spreads as low as 100 - 125 basis points over the six-month LIBOR.

Main gainers

Bankers said corporates that tapped ECBs in 2006 and early 2007 would be the greatest beneficiaries.

Dun & Bradstreet Information Services India Chief Executive Officer, Dr. Manoj Vaish, said, “If the rates are floating, corporate borrowers will benefit from the reduction.”

The fall in LIBOR implied a steep reduction in debt servicing costs to just about 5 per cent, including a forward premium of 1.4 per cent.

Many companies had raised foreign currency funds, when LIBOR was around 5 per cent. The reduction now implied an interest cost savings of at least 2 per cent that translates to improved bottom lines.

However GMR group’s Chief Financial Officer, Mr. A Subba Rao, said, “Only corporates that have left their positions open will benefit from the reduction. Borrowers who have hedged will find no benefit. Unwinding a hedge has a cost implication.”

Some borrowers have hedged their repayments on long-term borrowings by resorting to interest swaps -- floating to fixed during the entire tenure of the loan.

Bankers said, for new borrowers, sourcing cross-border funds at low costs was still difficult. They said the spreads sought were way above those raised in the past. In fact, the spreads now being sought was about 300 basis points for five year funds for corporates with high credit ratings.

The spreads sought are at least 50 basis points above Reserve bank of India (RBI) prescribed spreads in 2007. The RBI prescribed ceiling is 250 basis points.

Moreover, bankers said the Fed’s reductions were also unlikely to be emulated here, in view of liquidity implications and the consequent effect on inflation. Borrowings by institutions such as Rural Electrification Corporation and some public sector banks for upper tier capital/ tier one capital are yet to receive regulatory approval.

ECB curbs may stay

In fact, few bankers expect the RBI’s clampdown on ECB funds to be withdrawn given the current situation.

“When credit off take from the domestic banking sector is still low, where is the need for borrowing from cross border sources?” a banker asked. In fact, few bankers favoured relaxing ECB controls, fearing a flight of good quality assets from their books.

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