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Rising global rates, Re fall may scale down India Inc ECB plans

The weighted average cost had come down to 1.2 per cent over LIBOR in FY19, but has started increasing subsequently and was at 1.81 per cent in FY22. This is expected to increase further in the coming months with global central banks planning to hike the rates.

Written by George Mathew | Mumbai |
Updated: May 25, 2022 5:52:02 am

The rise in global interest rates and the depreciation of the rupee is likely to reduce the appetite of India Inc to mobilise funds through external commercial borrowings (ECBs) in the coming months.

The weighted average cost had come down to 1.2 per cent over LIBOR in FY19, but has started increasing subsequently and was at 1.81 per cent in FY22. This is expected to increase further in the coming months with global central banks planning to hike the rates.

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London Interbank Offered Rate (LIBOR), the global benchmark basic rate of interest used as a reference for setting the interest rate on other loans, was 2.73 per cent on May 20. When compared to this, State Bank’s one-year MCLR (marginal cost of funds based lending rate) is now at 7.20 per cent.

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ECBs account for a major share of India’s external debt and form for 36.8 per cent of India’s external debt as of end of December 2021. ECB approvals rose to $38.3 billion in FY22 from $34.8 billion in FY21. “However, with global interest rates poised to edge up, the relative attractiveness of ECB inflows may diminish. Further, the recent depreciation seen in the rupee will also weigh on ECB inflows this year,” says a Bank of Baroda research report.

“However, with global central banks on a monetary policy tightening cycle, interest rates are likely to go up. This may lead to a moderation in ECB inflows. Furthermore, the steady depreciation in INR recently will also be a headwind for ECB inflows going forward,” said Aditi Gupta, economist, Bank of Baroda. The rupee has already depreciated by over six per cent in the last one year. Corporates, while preferring ECBs, avoided domestic borrowing from Indian banks and lenders, leading to a sluggish growth in bank credit.

Explained

Share of external debt

external commercial borrowings (ECBs) account for a major share of India’s external debt and form for 36.8 per cent of India’s external debt as of end of December 2021.

RIL had raised $4.76 billion through this route last year. Of this, RIL’s $1.5 billion notes were priced at 2.875 per cent to mature in 10 years in 2032.

International capital market remains the major source of funds for Indian companies to raise funds outside. Lower global interest rates have driven corporates to explore funding options in capital markets across the globe. Share of the international capital market in total ECB approvals has increased sharply from 12.6 per cent in FY19 to 33.2 per cent in FY22 amidst a sharp dip in global interest rates. “Interest rates are rising at home and abroad. The difference in the rates between the two is likely to remain at the same level. So there won’t be a big fall in ECBs,” said a banking source.

The US Federal Reserve followed its first 25 bps rate hike in April 2022 with a double barrel action of another 50 bps hike and a planned balance sheet squeeze starting from May 2022.

The European Central Bank is expected to announce its first rate hike soon. The Bank of England’s Monetary Policy Committee approved a 25-basis point increase, taking the base interest rate up to 1 per cent recently. Global central banks have been hiking key policy rates to tame inflation.

ECBs play an important role in India by supplementing the funding needs of corporates.

India has seen a steady increase in resources mobilised through this route in the last few years.

Improvement in economic activity as well as low global rates have contributed to the attractiveness for this source of funding for India Inc, BoB report said.

Financial services account for a major share of total ECB approvals. However, the share of ECB funds mobilized by this sector has declined from 26.6 per cent in FY19, to 21.7 per cent in FY22. Financial services use such funds for onward lending and would tend to have a continuous demand for ECBs provided other conditions are favourable. Manufacturers of coke and refined petroleum products have raised a significant share of total ECBs, BoB said.

On the other hand, the share of electricity and power transmission has increased substantially from 6.7 per cent in FY19 to 19 per cent in FY22. Funding by this sector has been used mainly by companies engaged in providing renewable energy.

These three sectors have accounted for around 60 per cent of total approvals over the last 4 years.

Companies also utilise funds mobilized through ECBs to fund earlier ECBs. From about 32.3 per cent of total ECB approvals in FY17, the share of this category has declined to 18.4 per cent in FY22.

Firms are also increasingly using ECBs to meet their working capital requirements.

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