Lower interest rates in the global market has led to Indian corporates borrowing by way of External Commercial Borrowings (ECBs) rather than resorting to loans from Indian banks. Latest data from RBI shows that in the month of November corporate raised $ 3,484 million recording a growth of 36% over the previous month and a year-on-year growth of 60%.
At the same time bank credit for the fortnight ended November 28 stood at 11.29% year-on-year.
This is because in the absence of a rate cut by the Reserve Bank of India (RBI), the base rate or the minimum rate at which banks lend to corporates continues to be high. ECBs are available only to the credit worthy corporates. For corporates, ECBs are cheaper than domestic loans.
“Last year tightening was expected by the US Fed due to which corporates were slightly cautious. At that time spreads had also widened. Besides that last year due to volatility of the rupee against the dollar the hedging costs had increased. But now these corporates have resumed their fund raising due to interest rate differentials, compression of spreads and hedging cost being affordable,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
Last week after the end of the two-day policy meet the US Fed said it can be “patient” in its approach to raising the benchmark lending rate from a range of zero to 0.25%, where it has been since December 2008. Indian corporates may continue to tap the global market for raising funds in such a scenario.
“From various sectors if companies are raising ECBs then there is a hope to say that investments have started reviving. Everywhere hiking of interest rates are being postponed because of significant easing of global crude oil prices. US inflation may not pick up that fast. There are probabilities of postponing rate hikes. Markets are expecting US rate hikes by mid 2015 but it may get postponed,” said Rupa Rege Nitsure, chief economist and general manager, Bank of Baroda.
Meanwhile, the repo rate or the rate at which banks borrow from the central bank was increased by 25 basis points in January and since then it stood at 8%. In the fifth bi-monthly monetary policy review of RBI held earlier this month governor Raghuram Rajan said a change in the monetary policy stance is likely early next year should improvements in inflation and fiscal health continue.