The recent relaxation by the Government, allowing India Inc. to borrow more overseas may not be of much help given the shortage of US dollars in the overseas market.

While it is cheaper to borrow overseas due to the huge interest rate differential, the currency shortage is making it difficult for borrowers to do so. Only top-notch companies willing to pay a premium or highly-rated ones will be able to borrow overseas, said bankers.

Mr Moses Harding, Head-Global Markets, IndusInd Bank, said the Government's move to relax the overseas borrowing limit gives comfort to companies that there is a window available to them.

“The demand is huge, but supply is limited. So, lenders are charging a premium. Spreads on foreign currency loans have already gone up and will go up further. Only those corporates which have the ability to pay the premium will borrow,” he said.

In fact, the dollar shortage, which has been there since July, is one of the reasons for the reversal in the rupee's fortunes, Mr Harding added.

Liquidity constraint

According to Mr Tarun Anand, Managing Director and Senior Company Officer, South Asia, Thomson Reuters, liquidity is a constraint and it is going to be harder.

“The relaxation will allow only few large corporates to borrow overseas. Vast majority of them will not be able to borrow. But due to the attractive pricing, some companies will borrow overseas,” he said.

A report by Espirito Santo Securities said that even after adjusting for hedging costs, a AAA-rated Indian borrower can save over 100 basis points by borrowing abroad than domestically.

Thus, while the willingness and ability to borrow may prompt Indian corporates to go in for more External Commercial Borrowings, the availability of funds may become a constraint.

Credit default spreads

Ms Deepali Bhargava, Chief Economist with Espirito Santo Securities, said the credit default spreads have widened from 12 basis points to 28 basis points in September. This indicates the rise in the premium that borrowers will have to pay for their loans.

“The widening is not as steep as was seen in October 2008 during the Lehman crisis, when the spreads widened to 350 basis points. But they are on the rise,” she said.

Libor rates too have increased between July and now. In July the three month US Libor was 0.25 per cent and now it is 0.35 per cent.

Steps by central banks

Last week, the European Central Bank, the US Federal Reserve and some other central banks, including Bank of England, the Bank of Japan and the Swiss National Bank, announced some liquidity measures. The banks said they would carry out fixed-rate repurchase obligations against eligible collateral.

These measures may help in brining down the Libor rates to some extent. But even if the Libor decreases, the spreads will still be high, Ms Bhargava added.

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