Higher Hedging Costs Risk Derailing India Dollar Debt Binge
A U.S. one-hundred dollar banknote and Indian 10 rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Higher Hedging Costs Risk Derailing India Dollar Debt Binge

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(Bloomberg) -- A record overseas debt binge by Indian companies risks losing steam as rising hedging costs make those borrowings costlier than local debt.

Five-year annualized dollar-rupee hedging costs have risen to 4.8%, close to the highest since May 2017, according to QuantArt Market Solutions, a Mumbai-based advisory firm. While there has been no slack in the pace of dollar bond sales by local companies so far, prospective issuers are keeping a close watch on the costs as rates to borrow in local markets ease.

Higher Hedging Costs Risk Derailing India Dollar Debt Binge

“If hedging costs keep rising, it makes it difficult for borrowers to carry the exchange rate risk,” said Samir Lodha, chief executive officer at QuantArt. “Conservative companies will stay away from the dollar bond market, once they compare the relative value of onshore and offshore borrowings.”

The spoiler is coming at a time when the nation’s authorities are still working on bringing confidence back into the local credit market that went into a seizure about 18 months ago. Meanwhile, the rate at which highly rated companies can borrow in the local market has eased by about 130 basis points in the past year, a favorable move for Indian firms that are facing a record $92 billion wall of bonds maturing in 2020.

©2020 Bloomberg L.P.

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