Unhedged

The months ahead promise to be turbulent for the Indian rupee, with the Brexit referendum triggering global volatility, even as India is bracing for over $20 billion in foreign exchange outflows in September from the maturity of FCNR (B) deposits raised in 2013. The Reserve Bank of India’s (RBI) latest data on the country’s external debt position as of end-March 2016 show that while both the Government and the central bank are well-prepared to handle any future currency volatility, it is Corporate India that may be caught napping.

The big picture on the country’s external debt position is edifying. India’s foreign debt is no longer rising rapidly, with only a 2.2 per cent addition to the total debt stock ($486 billion) over FY16, after a 6-9 per cent spike in the last two years. The external debt-to- GDP ratio at 23.7 per cent is quite low by international standards, when many distressed nations sport three-digit figures. The Government has been far from profligate in borrowing from external sources with the sovereign external debt-to-GDP ratio at a modest 4.6 per cent. The proportion of loans due within a year to total debt, a point of concern during the turbulence of 2013, has fallen to a nine-year low of 17.2 per cent. Yes, upcoming FCNR (B) redemptions will cause short-term dues to spike. But RBI is very well-prepared for this event, having built up a substantial forex war-chest of $361 billion and taken pre-emptive positions in forward markets to meet dollar demand. Ironically, while public entities have taken proactive steps to handle these risks, Corporate India has not. With $182 billion of foreign currency loans outstanding, Indian companies owe twice as much as the Government to foreign lenders, a sixth of it due for repayment this year. Yet, a low proportion of hedged loans (15 per cent a year ago) and frequent admonitions from RBI to corporate borrowers to hedge their forex suggest that companies are ill-prepared to weather currency risks. Despite being caught out by currency volatility in the past (in 2008-09 and 2013), many firms are averse to incurring added hedging costs of 5-6 per cent, as they are wont to view forex debt as ‘cheap’ capital, banking instead on RBI to provide a safety net on the exchange rate. The opaque and short-term nature of hedging options and lack of a thriving onshore derivatives market are also cited as reasons .

But given the systemic implications of a foreign debt default, policymakers may need to do more to push Corporate India to fend for itself in the matter of currency risks. Recent ECB rules that enable Indian firms to raise overseas rupee debt is one good step. Beefing up the treasury desks of banks for better products and advice on hedging could be another. Forcing listed companies to make half-yearly public disclosures of their forex loans and hedge ratios may also put pressure on corporate borrowers to take currency risks more seriously.