India Inc raises $31.18 billion in overseas borrowing in the first 10 months of FY22

Overseas fundraising of domestic corporates in the first 10 months of the current fiscal is already at 90 per cent of the full year’s borrowing level in FY21. Indian companies continued to tap low-cost overseas funding before the interest rate hike by the US Fed Reserve, supported by a stable currency.

According to the latest RBI data, monthly external commercial borrowings (ECBs) of India Inc touched a nine-month high of $8 billion in January, taking the total overseas borrowing to $31.18 billion between April 2021 and January 2022. Indian companies raised $35.06 billion in ECBs for the whole of FY21. The borrowing in the first 10 months of the current fiscal was 75 per cent higher than $23.26 billion worth of ECBs raised in the corresponding period of the previous fiscal.

Volumes may come down

Madan Sabnavis, Chief Economist at Bank of Baroda, said the spike in overseas borrowing can be attributed to the currency stability and availability of cheaper funds in the overseas market.

However, ECB volumes are expected to come down in the upcoming months as higher energy prices due to the Russia-Ukraine war and massive capital outflow from India due to the US Fed tapering and interest rate hikes are likely to put more pressure on the domestic currency, thereby making overseas borrowing more costlier and less attractive to Indian borrowers.

To tame the high levels of inflation, the Fed already started its rate hike cycle by increasing the interest rates by 25-basis points (bps) last week. The Fed also indicated at least six more rate hikes in the current year.

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Rupee watch

The rising crude oil prices also added more pressure on the Indian rupee against the greenback. The rupee touched a historic low of 76.97 against the dollar in the first week of March as Brent crude oil prices soared past the $130/barrel-mark, highest since July 2008, following the Russia-Ukraine war.

However, the rupee has recovered since and rose against the dollar last week to close at 75.80 due to softening of crude oil prices.

But, Crisil Ratings, in its recent report, said, the domestic currency is likely to settle at 76.5 in March 2022. “The rupee is already reacting to the external tensions and, we believe, will depreciate further and settle around 77.5/USD by March 2023,” the ratings agency added.

Economic impact

The global economic fallout of the war is likely to impact the Indian economy as well as weigh in corporate's fundraising and expansion plans. The current fiscal also saw domestic companies raising $4.7 billion of ECBs for working capital, new projects ($2.15 billion), modernisation and import of capital goods ($3.46 billion), on the hopes of resumption in economic activity.

Sabnavis said, besides the high cost of borrowing due to the Fed rate hike, war uncertainty hinders any investment program overseas or purchase of imported inputs from abroad.

The IMF, last week, warned that the global economic fallout of the war is expected to negatively impact India's economy.

The negative impact on the US, the EU and Chinese economies could dampen external demand for India's exports, while supply chain disruptions could negatively impact import volumes and prices, a PTI report quoted Gerry Rice, IMF's Director of the Communications Department, as saying. “There's also the question of tightening financial conditions and heightened uncertainty, which can affect domestic demand and the fiscal position through higher borrowing costs and reduced confidence,” he said.