Foreign interest rate costlier

By: Dhruv Kharayat

The overseas borrowing window for Indian companies is narrowing as rising US treasuries and Libor(London Interbank Offer Rate) make debt from abroad expensive and domestic interest rates are on their way down, bankers said. US rates have risen in line with expectations of a Federal Reserve rate hike sooner rather than later, while local borrowing costs have come down due to rate cuts by the Reserve Bank of India (RBI). 

Ten-year US treasury yields have risen to 1.85%, the highest since May and a jump from 1.35% in July as strong economic growth numbers make an interest rate increase inevitable. The benchmark Libor has also risen, with the six-month rate at 1.26%, the highest since June 2009. About a year ago, even post hedging, the rates were competitive. For example SBI raised some tier I capital at 8.75% from the domestic market a few days ago. It has also raised some tier I dollar funds at 5.5% which post hedging comes to around 11%. Both these bonds would have been approximately between 9% to 9.50%, that gap has now widened.

Indian companies have borrowed about $7.6 billion from overseas until September, on track to beat the $8.2 billion borrowed in 2015, mainly due to record low borrowing costs in the last two years. However, borrowing from abroad also involves hedging costs. On the other hand, local policy rate cuts seem to be getting transmitted with the highest rated companies paying 7.44% for five year money, the lowest since April 2009 and down from the 11% peak in mid-2013.

Because domestic rates have come down, the gap between overseas and domestic rates are wider. Cost of borrowing for Indian companies borrowing from abroad is going up, though there are enough funds out there for companies with decent ratings.