Dollar-borrowing costs for Indian corporates have fallen to a six-month low, with average yields on Indian dollar-denominated bonds sliding to 4.5 per cent on January 30, according to Bank of America-Merrill Lynch indices.

In contrast, dollar-borrowing costs in China and Brazil are elevated at 5.9 per cent and 5.6 per cent, respectively. The development is likely to give a push to overseas fund-raising by Indian firms amid a rise in the cost of borrowing locally. Top-rated five-year corporate bond yields in India average 9.72 per cent at present, compared to 9.63 per cent at the end of 2013.

In addition, the depreciation is likely to reduce the debt burden of Indian businesses that were struggling to cope with sharp rupee depreciation that made their foreign borrowings too costly to service and raised the spectre of widespread defaults. According to Moody’s Investor Service, 14 of the non-financial companies that it rates in India had combined debt of $32 billion in the fiscal ending March 2014, out of which 50 per cent was denominated in foreign currency.

There is also a strong possibility of companies refinancing old loans in the hope of securing better rates in international markets.

The biggest beneficiary of cheaper dollar loans will be state-owned oil marketing companies, which are the worst-affected by rupee depreciation. This is because even though their revenues are linked to the US dollar, their EBITDA margins are thin at between 3 per cent and 5 per cent. They are also highly leveraged.

As a consequence of the improved scenario, the cost to insure debt against non-payment has also been dropping.

The situation could witness a sea change as the US bond purchase tapering plan continues. If the stimulus is further wound back from $65 billion a month as 2014 progresses, borrowing costs for companies in emerging markets such as India are likely to rise.

Related Topics
comment COMMENT NOW