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In the backdrop of the rupee continuously hitting new lows against the dollar, a top central bank official on Tuesday asked infrastructure project developers to exercise abundant caution in tapping overseas borrowings as they don’t generate matching foreign exchange earnings.
“While I do appreciate the recent measures by the Government of India and the Reserve Bank of India (to give a leg up to the infrastructure sector), I wish to sound a note of caution here due to a couple of reasons,” said K. C. Chakrabarty, Deputy Governor, RBI, at an infrastructure finance conclave in Agra.
He was referring to several concessions given to the infrastructure sector by the Government for credit enhancement, import of capital goods, utilisation of trade credit and the RBI initiatives to boost infrastructure financing by relaxing the overseas borrowing norms and treating debt due to lenders in public private partnership (PPP) projects as secured finance.
“First and foremost, as finance professionals, we must realise that in efficient markets, cost of borrowing in any currency, when adjusted for exchange rate differential, should be the same. Therefore, if one finds an arbitrage opportunity, it can only be for a short term.
“Adjusted for hedge cost, the external borrowing cannot be cheaper. The only way a firm can potentially benefit from borrowing in overseas markets is by gambling on the exchange rate and retaining an un-hedged forex exposure,” said Chakrabarty.
He said it is important to conduct a cost-benefit analysis in running an un-hedged/partially hedged exposure before accessing external finance.
Infrastructure, especially urban, does not generate matching foreign exchange earnings and, hence, there is a need to exercise abundant caution while the country is experiencing high current account deficit (CAD), he added.
The rupee has come under unrelenting pressure over the last one month on fears of dollars outflows from the Indian equity and debt markets on the back of brightening growth prospects in the US, widening CAD (which arises when a country's total import of goods, services and transfers is greater than its exports) and bleak domestic growth prospects.
So far this financial year, the rupee has depreciated by 16.5 per cent (about Rs 9) against the dollar. On Tuesday, the domestic unit, which breached the 64 mark, closed at a new low of 63.23 to the dollar.
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