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Rupee’s next pain point will be $79 billion of unhedged debt.


Indian companies are rushing to protect their overseas dollar debt from further drops in the rupee. This could lead to more losses for the rupee, which is already in bad shape.

According to the latest data from the Reserve Bank of India, companies in the country had $79 billion in unhedged overseas loans at the end of March. This was about 44 percent of their total overseas borrowings. As the rupee has dropped more than 7% this year, the cost of paying it back has been going up.

Since USD/INR broke above 79, companies have been doing more to protect themselves against dollar risk, said Parul Mittal Sinha, head of India financial markets at Standard Chartered Plc in Mumbai. “In the current risk-off environment, it’s likely that the number of dollar hedges will rise, which will increase dollar demand.”

The amount of foreign loans that aren’t hedged has gone up because RBI’s actions made companies feel better about their dollar exposure. This is because RBI made sure that the rupee was less volatile than its emerging-market peers. In the past few months, however, investors have been selling their stocks and the dollar has been strong, which has caused the currency’s losses to speed up and send it to a series of record lows.

A central bank study found that even though companies are starting to increase their level of hedging, it is still far below the minimum of 63 percent that is recommended for times of high foreign exchange volatility.

The rupee fell to an all-time low of 80.06 per dollar on Tuesday. Over the past month, it has lost 2.4% of its value, making it the third-worst performing Asian currency. According to data collected by Bloomberg starting in 1999, global funds have sold $29.5 billion worth of Indian shares so far this year. This is on track to be a record amount of money sent out of the country in a single year.

The rise in dollar-rupee forward premiums shows that Indian companies are doing more hedging, and Citigroup Inc. says that this is likely to become a major reason why the rupee falls in value.

Citi economists Samiran Chakraborty and Baqar Zaidi wrote in a research note this month, “Holders of external debt are likely to refinance their debt or pay it back with foreign exchange earnings.” “However, the US Fed’s tightening is getting more and more aggressive, which could raise the cost of external financing. This, along with a tightening of liquidity around the world, could make it harder to refinance the large amount of external debt that is due this year.”

Economists say that Citibank has changed its prediction for the rupee over the next 12 months from 79 to 81 per dollar.

Less expensive money

One way to avoid risk when borrowing from abroad is to stop using dollars for funding and look for cheaper options in the United States.

One of India’s leading green energy companies, ReNew Energy Global, recently replaced $525 million in dollar-denominated bonds with longer-term rupee-denominated funding.

In an interview last week, ReNew Power’s chief financial officer, Kedar Upadhye, said, “The company’s general policy is to hedge the forex exposure as and when it’s needed to protect against currency and interest rate risk.”

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