Many big Indian companies will take a huge hit from the rupee hitting an all-time low, while it may be good news for IT, BPO and export companies.
The Indian Rupee (INR) fell to Rs 54.51 per dollar, down 22% from January 2011.
As SMC Global Securities points out, this is going to make it much more expensive for companies that have to make regular payments in dollars, either to pay for raw materials from abroad or to service their loans from overseas.
“During the calendar year 2011, Indian corporates have raised about US$ 30 Bn of ECB (External Commerical Borrowing). That is, about Rs 1,50,000 Crores,” it said.
The fall in rupee value means that they now have to fork out extra money to pay as interest, repayments and other charges. In addition, the overall value of their loans (loan amount) also goes up, and the addition to the loan amount has to be provisioned out of their current profits, the brokerage pointed out.
“This naturally translates into an increased burden on the Indian companies in repaying the ECBs .. of US$ 6.6 Bn. That is, an additional burden of about Rs 35,640 Crores,” SMC pointed out.
As per the ICAI guidelines, the mark-to-market losses on forex needs to be provided as a provision on each quarterly basis in the financial statements, it noted.
“This can be a death blow on various aspects of Indian economy and Indian companies.. and can result in disastrous june quarter results,” it added.
Indian companies typically preferred to take loans from foreign countries as the interest rates in India is typically around 13%, while it is about half of that overseas.
However, any devaluation in the value of the rupee gets added to the interest rate, as the payments have to be made in foreign currency.
“However, such Indian corporates are realizing now the side effects of non-rupee borrowing. In the case of non-rupee borrowing, the forex fluctuation can be very punishing, as it is happening now,” SMC pointed out.
“Several companies must have learnt now, that they would have been better-off had they borrowed in Indian rupees instead of ECBs,” it added.
The companies who would have hedged such dollar exposure can weather through this sharp rupee depreciation. However, the companies who would have unhedged their exposure, are literally sitting on “ECB Time bomb”, SMC