For many years, the biggest Indian companies favored dollar loans. They offered low-cost funds and easy global access. However, the times have changed. The rupee is struggling, interest rates are rising, and investment expenses are getting more expensive. Additionally, reputable companies are reducing their foreign exchange borrowing, from Reliance to Adani. The amount of dollar loan proposals fell from $11 billion to $2.91 billion in a month. So, is this a change in short-term strategy or a silent revolution in corporate finance?
Why Are Firms Pulling Back on Dollar Loans?
Foreign currency borrowing made sense when India Inc. benefited from the interest growth. That edge is quickly disappearing now. Particularly following rate hikes in the US, global yields have increased significantly. Meanwhile, loan rates in rupees are more affordable than before.
The large interest spread allowed businesses like Reliance to borrow money overseas at a lower cost until recently. Since that gap has closed, local borrowing is now more appealing. As a result, dollar loans are becoming less appealing.
Furthermore, pressure is coming from the stronger US dollar. To repay the same amount in dollars, businesses must pay more rupees. This has made currency risk higher, especially for companies with uncontrolled exposures. Furthermore, it is a serious concern that more than 40% of India’s external borrowings are not hedged.
Rules and Currency Risk Push Shift to Rupee
Policy changes are a major factor. The RBI has tightened the regulations for external commercial borrowings (ECBs). It limited the use of dollar loans to pay back rupee debt. Tighter ESG rules globally. Additionally, it makes borrowing internationally more difficult, particularly for smaller businesses. As a result, rupee funding is more appealing.
Additionally, domestic markets are becoming more liquid. Firms are switching as local borrowing becomes more cost-effective. This change aims to reduce exposure to global shocks and minimize currency risk in addition to cost. Approximately 36.5% of India’s total external debt is currently held by the corporate sector, which also supports the rupee.
Even India’s external debt-to-GDP ratio of 19.1% indicates a manageable position. Additionally, given the state of the world economy, it is imperative to reduce borrowing overseas. This is characterized by trade disputes and recessionary concerns. Finally, gains are no longer assured by the interest spread.
Businesses see little benefit in taking on forex exposure as US and Indian rates converge. Therefore, by moving to rupee loans, businesses are avoiding global volatility and placing their bet on local stability.
What Do Falling Dollar Loans Signal?
India Inc.’s departure from dollar loans points to a more significant structural change in financial strategy as well as corporate borrowing. Thus, businesses are protecting themselves from global shocks by picking local credit and lowering their external debt. This change may lessen the demand for loans in foreign markets and lessen the power of foreign lenders in Asia. Could other emerging markets see comparable actions as a result of this?
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