Outgo towards interest payment forms a significant portion of expenses of companies that have higher loans on their books. It is not easy for them to get cheaper loans unless RBI adopts the accommodative monetary policy stance. Monetary policy actions depend on a number of factors such as inflation, fiscal management of the Government and overall economic growth, to name a few. Recently RBI announced its 1st bi-monthly monetary policy for the Financial Year (FY) 2015-16. As expected by many bankers, the central bank held policy rates unchanged. Corporate desperately want to see their borrowing cost going down as their profitability is already hit by the slow revenue growth and broader economic lull.

To overcome this, a number of Indian companies have been aggressively borrowing from overseas markets. As western countries have been following ultra-loose monetary policies for almost past 7 years; borrowing abroad has become very attractive for Indian companies.
 

High Dependence of India Inc. On Offshore Funds...

(Source: RBI, PersonalFN Research)  

Whenever, a company raises a foreign currency denominated debt, it not only exposes itself to currency risk; but also puts pressure on India's forex reserves. On number of occasions RBI has warned companies against their unhedged foreign currency exposure. Despite of that, companies, on a few occasions, have been reluctant to hedge their positions considering relatively stable rupee and the high cost of hedging. If corporate see that they are losing the benefit of borrowing abroad due to higher cost of hedging, they keep their positions unhedged. To address this issue, recently RBI decided to allow companies to issue rupee-denominated debt abroad.

What are the positives of this decision?

• The most important change would be in currency risk exposure. While foreign currency denominated loans require issuer of the debt to retain the currency risk exposure; the rupee denominated loans allow issuers to pass it on to investors.
   
• Since Indian companies would issue rupee debt abroad; Indian bond market may deepen.
   
• As companies will now have access to overseas markets without having to bear the currency risk; there might be less pressure on banks to lend to corporate
   

What may not change?

• The recent decision of RBI to allow companies raise rupee loans abroad is unlikely to bring the cost of funds down for companies. This is mainly because the subscribers to these bonds would expect higher rate as compensation for retaining the currency risk
   
• Only well established companies with high credit quality would be able to raise rupee loans overseas. This may still make many aspirant Indian companies depend on domestic sources or to issue foreign currency denominated bonds abroad
   
• Foreign Institutional Investors (FIIs) having regulatory clearance to invest in India may not subscribe to rupee bonds listed on offshore exchanges
   

PersonalFN is of the view that, it's a welcome move from RBI. Given the poor state of Indian banks due to higher Non Performing Assets (NPAs), banks are going slow on loan disbursals. This has also resulted in interest cost remaining higher for Indian corporate. With the new development, raising rupee loans abroad may become possible to companies, giving more breathing space to banks.

However, PersonalFN believes, that, effectiveness of this route may remain limited at least initially, as there may not be many active subscribers to rupee debt issued abroad. Subscribers would be keen to investing in Rupee debt only when outlook on rupee is extremely stable and interest rates are high.

Speaking about its impact on Indian debt markets, PersonalFN believes that, yields especially on shorter maturity bonds may fall if offshore rupee-denominated bonds get good response. At present FIIs can't invest in bonds with residual maturity of less than 3 years. In such a case if foreign investors have appetite for Indian corporate debt with shorter maturity, they might look at rupee-denominated offshore debt.

PersonalFN suggests that you shouldn't speculate on bond yields and invest in debt funds only after being sure about your time horizon which should ideally concur with the maturity profile of the fund. Having said this, you should avoid investing more than 20% of your debt portfolio in long term debt funds. It is noteworthy that, debt funds are not risk free.

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