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‘65% of India Inc foreign debt unhedged’

This potentially dents profitability on account of the large foreign exchange obligations: RBI

Written by ENS Economic Bureau | Mumbai | Published: October 17, 2012 1:31:46 am

India Inc foreign debt: Overseas loan exposures of Indian corporates have remained unhedged to the extent of 65 per cent,potentially denting their profitability on account of the large foreign exchange obligations,a senior Reserve Bank of India official warned on Tuesday.

“About 60-65 per cent of their exposure is unhedged. They should have appropriate risk management systems and banks should look at their clients exposure,” RBI Deputy Governor HR Khan said.

Khan’s comments follow Suzlon Energy’s default on the repayment of FCCBs amounting to $ 220 million due earlier this month.

A Standard & Poor’s (S&P) forecast in June 2012 had warned that more than half of the 48 companies that are due to redeem an estimated US $ 5 billion of convertible bonds in 2012 may default,while the others may redeem by borrowing at high cost or stiffer terms,he said.

“The recent phenomenon of sharp fluctuation in the exchange rate,particularly sharp depreciation of the rupee has imparted severe pressure on the profitability of many Indian firms having large foreign exchange obligations.”

Khan said the capital inflows to the country through ECBs,while helping the country fund the current account deficits and corporate to raises resources at a lower cost,could become a source of the transmission of severe external shocks to the domestic economy. “Therefore,it is important to develop the domestic corporate bond market to enable corporates to meet a substantial part of their funds requirement domestically,” he said at the Yes Bank-FT summit here.

The central bank deputy governor added that a study on the various sources of finance within the country showed that large corporates engaged in non-financial activity have been raising 4 per cent via debt while bank borrowings and foreign currency borrowings accounted for 17.8 per cent and 3.2 per cent respectively as on March 31,2011.

Khan also stressed that the central bank would intervene in the foreign exchange market in case of extreme volatility in the rupee.

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