Falling rupee, rising hedging costs may sour India Inc’s offshore borrowing plans

Rupee

A sharp depreciation in the domestic currency in the past couple of months, which saw the rupee hit a record low of 86.36 against the dollar on January 13, is leading to higher dollar hedging costs for Indian companies, making offshore borrowings an expensive affair, bankers and industry observers have said.

Power transmission project developer Sterlite Grid, which recently raised Rs 2,450 crore to refinance loans of one its biggest projects, opted for domestic sources of funding, as hedging costs made offshore borrowing relatively unattractive.

“With SOFR (secured overnight financing rate) at around 5 percent and a country risk premium of approximately 2 percent to 2.5 percent, the pricing would have been in the range of 8 percent in dollar terms, give or take 50 basis points.

“Even at 7 percent to 7.5 percent, once you factor in the hedging costs for both the dollar and SOFR, the effective pricing would have been significantly higher,” Raji George, director corporate finance, Sterlite Power, told Moneycontrol last week.

For refinancing, Sterlite raised money from domestic state-backed financial institutions at approximately eight percent.

The depreciating rupee, combined with other factors such as slower than expected rate cuts by the US Fed and concerns about a global tariff war under the incoming Trump administration, are souring the sentiments for offshore borrowing, which could impact the plans of large Indian corporates such as the Adani group, the JSW group or several Indian renewable energy companies which frequently raise funds by way of dollar bonds or loans.

India Inc raised $9.6 billion from overseas bond offerings in 2024, double the issuances in 2023, data from LSEG shows.

Since Trump’s presidential win in early November, the rupee has depreciated 2.86 percent against the dollar in less than three months.

On January 13, the rupee fell by 32 paise, its sharpest single day fall in two years.

According to bankers, while the depreciating rupee is already hurting unhedged or partially hedged past borrowings, for new borrowers, the rise of the dollar forward contracts is becoming a challenge to their plans to raise foreign loans.

“The recent increase in USDINR FX forwards and cross-currency swap levels has pushed up the overall cost of hedging itself. To that extent, raising offshore financing has become relatively more punitive,” said Ganeshan Murugaiyan, head of corporate coverage and advisory, BNP Paribas India.

“Corporates who have raised offshore financing in the past and have not fully hedged the FX risk, would witness an adverse impact due to the recent INR depreciation.”

The rupee depreciation will, however, not impact to the same extent corporates who have a natural hedge on the business side or institutions which are focused on the credit spreads rather than the base rates, he added.

Offshore financing still an option

Ganeshan, however, said given the tight liquidity conditions domestically, offshore financing may still be a relatively attractive route for corporates looking to raise large amounts.

“Corporates looking to raise larger amounts of financing than what they can raise from domestic banking channels or NBFCs that find domestic fund raising from banks expensive due to higher provisioning will continue to look at offshore financing options despite the rise in hedging costs.

“Overall rates are one of the factors and corporates have to strategically evaluate other factors like availability of longer tenor or diversification of funding sources while deciding on the appropriate balance of financing solutions,” he said.

Other industry watchers are also hopeful that despite the rupee depreciation, the offshore debt market activity of Indian companies may still see an improvement from the previous year, given India’s relative attractiveness vis-a-vis other emerging markets.

In 2024, Indian borrowers saw a significant surge in dollar-denominated bond offerings, with proceeds doubling from the previous year to reach $9.7 billion, driven by strong investor appetite, said Elaine Tan, senior manager at LSEG Deals Intelligence.

While the depreciation of the rupee, slower-than-expected Federal Reserve rate cuts and potential tariff wars pose challenges and temper momentum, the underlying demand for offshore financing remains robust and attractive for Indian companies in accessing a broader investor base and diversifying funding sources, Tan said.

“India’s compelling growth narrative, particularly among emerging markets, as well as the recent inclusion of Indian bonds in one of the major bond indices has boosted investor sentiment and appeal of Indian bonds globally,” Tan said.

Ganeshan said he expected the overall volume of offshore financing deals for 2025 to be higher than the previous year.