INSUBCONTINENT EXCLUSIVE:
Mumbai: The widening current account deficit (CAD), which is projected to cross 2.6 per cent of GDP this year, coupled with the rupee
plunge, is likely to increase borrowing costs for corporates and bring down the overall volume of fresh forex loans, says a report.
By
losing over 9 per cent year-to-date, the rupee is the worst performing among major emerging markets currencies
The currency plumbed a new closing low yesterday at 70.15 against the American dollar.
The rising CAD and crude prices and the falling rupee
have spiked the June quarter CAD to 1.9 per cent against 0.9 per cent in the year-ago period, and the same is projected to scale 2.6 per
cent by March.
"A widening CAD, weakening rupee, coupled with rising interest rates, and forward premium can impinge on the ability of
corporates to tap foreign markets to raise debt capital
For instance, annualised forward premium on the three-months rupee-dollar futures contract rose to 4.36 per cent on August 21 from 3.46 per
cent on March 31, 2018, reflecting a commensurate rise in hedging costs," India Ratings noted in a report today.
Similarly, higher capital
outflows and widening CAD will increase the credit spreads, it warned.
The widening CAD is accompanied by an increase in capital outflows
(USD 5.5 billion so far in FY19) primarily from debt capital markets, it said, adding this can further worsen the demand-supply mismatch in
debt markets, thereby widening credit spreads over the near to medium term.
It can be noted that higher CAD not only results in a hardening
of benchmark yields--the 10-year Gsecs yields, but also puts upward pressure on companies' credit spreads, which will cull their liquidity,
further reducing their financial flexibility.
The report warned that the pains for the rupee is not over yet as it sees externalities
resulting in turbulence in EM currency markets are likely to result in more volatility of the rupee over the near term.
"A sharp rise in
yield volatility typically increases investors' exposure to interest rate risks and therefore increases the uncertainty risk premium," it
said.
Over the last 16 months, not only have corporate yield curves have been shifting upwards, but also the curvature of the yield curve
itself has transformed, primarily driven by a higher increase in short- and intermediate-term yields than in short-term and long-term
yields.
"We believe that this shift will raise borrowing costs for corporates and financial institutions looking to mobilise capital for
intermediate tenures to fund capex requirements," the agency said.
Noting a strong correlation between effective cost of funds and CAD, the
report said the challenges in mobilising risk capital are likely to intensify for corporates in case fiscal challenges like weakening
balance of payments (BoP) situation continue for a longer period.
A moderation in BoP typically translates into a substantial rise in the
effective cost of funds for the top 500 corporate borrowers by debt and is accompanied by a consequent moderation in the median interest
coverage ratio.
Despite a significant weakening of the rupee, merchandise exports have remained subdued and even contracted in the last two
GST-led disruptions in input credit lock-up last year dampened MSME exports
