If foreign portfolio investment inflows continue and hedging costs remain subdued by way of the Reserve Bank of India’s actions or otherwise, foreign currency borrowings could pick up considerable pace during FY20, easing the demand-supply gap in the domestic credit markets, according to India Ratings and Research (Ind-Ra).

The recent softening of the Indian rupee-US dollar (INR-USD) forward rate, if sustained at least in the foreseeable future, is likely to provide a fillip to Indian borrowers who plan to raise foreign currency-denominated capital, the credit rating agency said.

“A change in the global monetary policy conditions, along with the first round of the three-year swap auction, has already moderated the three-year cross-currency swap rate by 30 basis points (bps) on April 15, 2019, from the January 2, 2019, level.

“Meanwhile, during this period, the INR-USD forward premium moderated by 71bps, driven by a marked improvement in the domestic market’s dollar liquidity conditions,” the agency elaborated. One basis point equals one-hundredth of a percentage point.

Ind-Ra said that considering the moderation in the London Inter-Bank Offered Rate (LIBOR) and the softening hedging costs while domestic interest rate transmission remains muted, cost savings on foreign currency borrowings are likely to materially improve over the near to medium term.

The spread between the SBI marginal cost of funds-based lending rate (MCLR) and the all-in LIBOR-linked cost (after accounting for hedging cost) increased to 2.48 per cent on March 29, 2019, from 1.28 per cent on September 28, 2018.

The agency assessed that the interest outgo of the top-500 debt-heavy corporate borrowers could cumulatively reduce by ₹4,000-7,000 crore, assuming a 0.50-0.75 per cent reduction in the cost of forex borrowings, and a 50bps-200bps rise in the share of forex borrowings in the outstanding debt of these corporates.

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