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Unhedged forex loans manageable but rupee to weaken to 82 a dollar: Bank of America

In FY14, the deficit was 4.8 percent of the GDP and forex reserves had fallen to 16.3 percent of the GDP due to heavy intervention by the RBI

July 29, 2022 / 12:10 PM IST

The rupee’s sharp fall to all-time lows has rekindled worries over the unhedged foreign exchange loans that Indian companies have borrowed as repayments and servicing interest have become expensive with the dollar’s rise.

The unhedged foreign currency loans is only 22 percent of the outstanding stock of external commercial borrowings, far lower than the stated $79 billion, point out the research wing of Bank of America. Further, of this 22 percent, a large portion of companies that have taken these loans earn some part of their revenues in foreign currency. This offers them a natural hedge somewhat, the bank’s research report stated.

“Thus, a fairly small portion of the total outstanding ECBs are truly unhedged. Taking into account natural hedges and the exposure of public sector companies, the optimal hedge ratio condition is comfortably satisfied in the case of the stock of ECBs,” the report said.

In its financial stability report, the Reserve Bank of India (RBI) had said that $79 billion worth of forex loans were unhedged. On July 22, Governor Shaktikanta Das said that $40 billion of this $79 billion were by public sector companies that have a natural hedge and also the comfort of a sovereign backing.

Further, the maturity profile of these loans suggest that repayments are spread out this year between September and March, the economists said. That said, the months of September and October may witness heavy repayment load which could pressure the exchange rate.


“A look at the maturity profile of ECB for remainder of FY23 shows that $16.5 billion is maturing between August-March, with September, February and March being heavy months,” the report said.

The economists point out that external sector indicators are still healthy although some pressure on a widening of the current account deficit can be felt. Compared with 2013, the forex reserves to gross domestic product (GDP) ratio is higher at 18 percent, while the current account deficit is expected to be 3 percent of the GDP.

In FY14, the deficit was 4.8 percent of the GDP and forex reserves had fallen to 16.3 percent of the GDP due to heavy intervention by the RBI.

The central bank has been intervening heavily this time too. “Given the still comfortable forex reserves and forward book and the slowing global commodity prices which will eventually show up in monthly trade deficit numbers, we see the INR depreciating gradually. Our forex strategist sees the INR at 82 per USD by December 2022,” the report said.
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