The Euro zone is still in a hot mess and Greek default fears are looming large. Investors are now scrambling to find some safe haven for their capital. In a flight to liquidity, they are scrambling to buy dollars, liquidating positions in other risky assets. The US dollar is emerging as a highly liquid asset, even trumping gold. Consequently, the Indian rupee has sharply depreciated versus the dollar over the past two months. It has fallen by over 12% to Rs 50/US$ from around Rs 44/US$ at the beginning of August. Equities have also slid sharply with the benchmark BSE-Sensex shedding a fifth of its value since the start of 2011.
So what impact does the exchange rate have on the foreign borrowings of India Inc.? Most corporates rushed overseas in order to take advantage of cheaper borrowings abroad. This was on account of the rising interest rate environment in the country due to RBI's hawkish stance against inflation. So with the rupee at Rs 50 versus the dollar, are companies which have issued Foreign Currency Convertible Bonds (FCCBs) at risk?
Well, this crisis may not play out just yet. According to data from Bloomberg, only 11 FCCBs are maturing over in the next three months with US$ 598 m in total outstanding. This amounts to less than 10% of the total amount outstanding of US$ 8.9 bn due at the end of the fiscal year 2015. A large portion of these FCCBs are due within two years, in 2013. FCCBs due in the next quarter include those from Reliance Natural (US$ 300 m), Financial Technologies (US$ 90.5 m) and Gitanjali Gems (US$ 83.6 m). Out of these, only Gitanjali Gem's shares are trading well above the conversion price, thus it may see some equity dilution in the future on this account. Other companies may exercise an early buyback of this FCCB debt, closing the issue out earlier.
There is no need for corporates to be too worried about the rupee depreciation affecting their FCCB borrowings in the near term. However, a sustained weakness in the rupee over the next 1-2 years may cause significant damage. There may be an issue next fiscal as close to US$ 4.4 bn in FCCB debt is maturing. If the rupee continues to be at the above Rs 48/US$ mark and if stock prices do not rise above the conversion prices, these companies may be saddled with a huge repayment burden. There may not be too much to worry about right now. But a sustained weakness in the global economy and the rupee could sink a few companies when the repayments come due.