Overseas borrowings become attractive with improvement in macroeconomic fundamentals.

Overseas borrowings have become attractive for Indian companies with the recent improvement in macroeconomic fundamentals at home. This means the cost of funds involved in raising money outside India has fallen. According to the Reserve Bank of India data, the average spread over Libor (London interbank offered rate) for external commercial borrowings (ECBs) has reduced by more than 50 basis points in the last few months.

Experts say this will lead to an increase in overseas borrowings of Indian companies in the coming quarters if the rupee stablises at current levels. They say one of the chief reasons for this is the change in outlook towards the Indian economy. "There is a new-found optimism on Indian economy in the recent months. Investors have responded well to the recent ECB issues, which stems on account of the new government and lower deficit.

We have seen an at least 50 basis points compression in coupon rates since the last couple of months," said Randhir Singh, India head-financing at Deutsche Bank. Interestingly, this time, overseas investors have not been as selective in their approach to the bond issues of overseas subsidiaries of Indian companies as they were a year ago. For instance, Motherson Sumi, with a rating of BB, was able to raise 500 million in June 2014. A company's issue should be above BBB for the loans to be known as investment grade.

"We have also seen stronger investor appetite for subinvestment grade issues. While last year, the total high yield issuance amount was about $1.85 billion, it has already crossed $3.5 billion this year," added Singh. Indian companies raised $14.5 billion through the ECB route in the six months ended June against $17.6 billion raised in the year-ago period.

This 17% year-on-year drop was mainly due to the fact that Indian companies have been cautious on capital expenditure. "Once India's economic growth revives, corporates' interest in accessing borrowings from overseas markets is likely to pick up," said Aditi Nayar, senior economist at Icra. "Companies that have a natural hedge, such as sizable export earnings, as well as those undertaking overseas acquisitions are more likely to raise funds through the ECB route.

In addition, companies in sectors such as infrastructure, capital goods and low-cost housing may raise funds through this route." Besides, the domestic currency may need to stabilise around the present rate for companies to have confidence in overseas borrowing. "Volatility in domestic currency will lead to higher hedging costs for the currency," Nayar added.

At the end of FY14, India's fiscal deficit has narrowed to 4.5% of GDP from 4.9% in the previous fiscal. Besides, the formation of a stable government at the Centre has also improved the perception of investors towards the Indian economy, which had been lagging due to lack of action on policy front.

These two factors have worked in favour of Indian companies and those that intend to borrow from overseas would be able to do so since economic revival is imminent in India.

Source : economictimes.indiatimes.com