Dollar loans are risky, Chakrabarty tells corporates

The RBI Deputy Governor, Dr K.C. Chakrabarty, has discouraged Indian corporates from raising dollar-denominated borrowings due to associated risks. He also expressed concern over the volatility of rupee against the dollar.

“In any efficient market, the currency you borrow does not change your cost of funds. However, in some currencies, if the cost is lower the risk will be more,” Dr Chakrabarty said addressing newspersons on the sidelines of the launch of a financial inclusion programme called ‘Axis Bank Bandhan Holistic Assistance' here on Saturday.

The successive rise in domestic interest rates and the consistent appreciation of rupee against dollar in the recent past seem to be encouraging companies to opt for raising dollar-denominated funds.

“We do not encourage dollar borrowings as cheaper loans only attract higher risks. If the risk manifests then you [the companies] are out of business,” he pointed out.

Volatility, the worry

To a query on the movement of rupee against the dollar, he said the RBI was more concerned about the volatility in the currency.

“If you consider only the economic factors then ideally rupee should depreciate. However, it is determined by several other factors such as the demand-supply situation,” he added.

To tame inflation, the central bank has hiked interest rates 11 times since March 2010.

High interest regime

Though he admitted that high interest regime might impact the investment climate, Dr Chakrabarty said it was difficult to keep interest rates low in a high inflation regime. It was, therefore, the RBI's prerogative to keep the inflation rate low.

On the deregulation of interest rates on savings bank deposits, he said: “If all other interest rates are deregulated then that on SB accounts should also be done. However, when and how it is done is something which needs to be seen.”