india inc: The dollar route to India Inc loans
Here again, interest rates are tightening faster abroad than at home. ECBs are mainly based on Libor up to one year (London Interbank Offered Rates), which have risen even faster. Add the cost of hedging and the interest rate differential narrows considerably. The Reserve Bank of India (RBI) has, for the next six months, doubled the ECB cap in the automatic lane to $1.5 billion from $750 million to help businesses ride out the repayment hump. It also gave prime companies a higher overall cost, including things like arranger and processing fees, by up to a percentage point. This relaxation of credit controls will, however, have to contend with larger fundamental forces at play, such as pressure on India’s capital and current accounts.
External debt as a ratio of gross domestic product (GDP) and debt service as a ratio of exports of goods and services declined in the 12 months to March 2022. With commercial borrowing becoming less attractive, we can reasonably expect this trajectory to continue, despite the central bank’s efforts to support the ECBs. India Inc is turning to expensive local credit to finance growth at a time when foreign equity investments are on the run.