Weak rupee will hit corporate borrowers hard

Mumbai : Even as they deal with rising input costs and high interest rates, Indian companies which have raised funds from overseas sources have been dealt another blow as a weak rupee has made debt servicing dearer.

The rupee fell to its record low so far at 52.73 to a dollar Tuesday morning on the back of international volatility and increased demand from importers.

“During 2011 till date, Indian corporates have raised about $30 billion of external commercial borrowing (ECB). That is, about Rs.150,000 crore,” said Jagannadham Thunuguntla, head of research, SMC Global Securities.

At the same time, the rupee has slid from 44.67 to a dollar on Jan 1 to 52.73 Nov 22 — a depreciation of 18 percent.

“This naturally translates into an increased burden on the Indian companies in repaying the ECBs. Such additional burden works out to $5.4 billion. That is, an additional burden of about Rs.27,000 crore,” added Thunuguntla.

Companies preferred to raise funds through the ECB route as interest rates were much lower at 5-7 percent, compared to the 12-14 percent that Indian lenders were charging.

But the weak rupee has now played havoc with many of their calculations as the cost of servicing these loans has gone up considerably.

As per accounting guidelines, companies also have to make provisions for losses on account of foreign exchange transactions. This will have a bearing on their quarterly financial statements in the September-December period.

“This additional burden of Rs.27,000 crore on ECB forex conversion can result into disastrous December quarterly results,” said Thunuguntla.

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