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India's ECB market: long term downturn or short term blip?

External Commercial Borrowings (ECBs) are commercial loans advanced to Indian borrowers in a foreign currency by non-India resident Lenders. Following the gradual relaxation of India’s tight external debt controls in the mid-1990s and early 2000s, ECBs have emerged as an important source of funding for eligible Indian entities, particularly in the financial services, petro-chemical and energy sectors which make up nearly two-thirds of India’s ECBs. Certain parameters continue to limit the availability of ECBs to domestic borrowers, including minimum maturity, non-permitted end-uses and a maximum all-in-cost ceiling, but providing a means to access the cost advantages of the last-ten-year trend of low global interest rates during a period of unprecedented growth for the Indian markets has resulted in ECBs now consisting of over 35% of India’s external total debt.

Figure 1. Source: RBI via Financial Express

While yearly RBI data shows an increase in ECB inflows to $38.2 billion in FY22 (see Figure 1), a closer look at both the commercial context and RBI statistics suggests that ECBs may be facing significant headwinds.

First, reviewing monthly figures provide a more accurate picture. In April 2021, for example, Indian entities raised US$2.4 billion via ECBs. In March 2022, this figure was US$5 billion. In April 2022, which is the most recent full month of data, this dropped to US$361 million, a 93% decrease from the month before. In terms of quantity, over 115 individual ECBs were included in RBI data for March 2022; in April 2022 this was only 64.

The RBI also provides details on the ‘purpose’ of these ECBs. In March 2022, 13 ECBs were advanced with the purpose of refinancing either an earlier ECB or a pre-existing Rupee loan, with an aggregate equivalent value of US$938,647,275. In April 2022, only a single ECB was used for refinancing, with an equivalent value of only US$8,927,653. This data signposts a rapid drop-off for ECBs in terms of both value and quantity, as well as in the appetite of Indian corporates to take on new ECB exposures in place of existing debt.

As mentioned above, the uptake of the ECB regime was driven by Indian corporates seeking to reduce their cost of funds by accessing the lower interest rates available in global debt markets, and thereby avoiding the relatively high interest rates which have been a constant staple of the Indian domestic market. Similarly, the recent decline in ECBs’ popularity seems to be attributable to borrowers deciding that their balance sheets would be better served without going overseas.

We are seeing the fastest rise in global interest rates in 30 years, with nearly four dozen central banks having raised rates in the last six months in an attempt to rein in the growing inflation resulting from increases in energy prices due to the war in Ukraine, as well as the continuing impact of Covid-19 on global supply chains. For example, the Federal Reserve US benchmark interest rate has increased from less than 0.1% at the beginning of the year to over 1.5% as of June 2022, including a single increase of 0.75% – the largest since 1994. In a similar vein, the Bank of England’s Monetary Policy Committee has voted for rate increases of 0.25% in every month since December 2021, with the bank rate now at its highest in 13 years.  Increased interest rates directly increase the cost of servicing loan interest obligations, but also affect the price of currency and interest rate hedging, which ECB borrowers will factor into their total cost of funds. The efforts of global central banks, in particular the US Fed, and the rise in crude oil prices given the ongoing war in Ukraine are also putting downward pressure on the Rupee, which makes it more expensive for Indian borrowers to service payments in foreign currencies and thereby makes ECBs less attractive.

In essence, the issues which are buffeting global markets more generally are having a more pronounced effect on ECBs in India.  In particular, rising interest rates in the Eurozone, the US and the UK, will potentially make ECBs less popular when juxtaposed with domestic lending.  However, rising inflation is a global trend and it remains to be seen whether increasing interest rates will counter this in India, especially against patterns of high growth over the last decade.  As we have discussed previously, Indian lenders are reticent to take a proactive role in negotiating with borrowers and we may yet see a marked increase in loan delinquency as a result.  The ECB market is critical to India’s finance markets, but is clearly in a state of flux for now.

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