Aartee Mishra is teaching live on Unacademy Plus
aily Lectuire Series Ramesh Singh' V brief summary o unacadeny 1 Indian Economy y Aartee Mishra External Sector inIndia Hindi
lam Aartee Mishra Graduated from Delhi University, Topper in all my semesters, Pursuing P.G and preparing for CSE. 2 Years of teaching experience of General Studies for competitive examination Have been teaching on Unacademy Plus
RISKS IN FOREIGN CURRENCY BORROWINGS Corporate borrowers in India and other emerging economies are keen to borrow in foreign currency to benefit from lower interest and longer terms of credit. Such borrowings however, are not always helpful, especially in times of high currency volatility. During good times, domestic borrowers could enjoy triple benefits of lower interest rates, longer maturity capital gains due to domestic currency appreciation. This would happen when the local currency is appreciating due to surge in capital flows and the debt service liability is falling in domestic currency terms. The opposite would happen when the domestic currency is depreciating due to reversal of capital flows during crisis situations, as happened during the 2008 global crisis.
RISKS IN FOREIGN CURRENCY BORROWINGS A sharp depreciation in local currency would mean corresponding increase in debt service liability, as more domestic currency would be required to buy the same amount of foreign exchange for debt service payments. This would lead to erosion in profit margin and have 'mark-to-market' implications for the corporate. There would also be 'debt overhang problem, as the volume of debt would rise in local currency terms. Together, these factors could create corporate distress, especially because the rupee tends to depreciate precisely when the Indian economy is also under stress, and corporate revenues and margins are under pressure.
RISKS IN FOREIGN CURRENCY BORROWINGS In this context, it is felt that one of the factors contributing to faster recovery of the Indian economy after the 2008 global crisis was the low level of corporate external debt. As a result, the significant decline in the value of rupee did not have a major fallout for the corporate balance-sheets. Foreign currency borrowings, therefore, have to be contracted carefully, especially when no 'natural hedge' is available. Such natural hedge would happen when a foreign currency borrower also has an export market for its products. As a result, export receivables would offset, at least to some extent, the currency risk inherent in debt service payments. This happens because fall in the value of the rupee that leads to higher debt service payments is partly compensated by the increase in the value of rupee receivables through exports.
Meet you in Next Lesson Do remember to download the Unacademy Learning Appfrom the Google Playstore Do Subscribe to Unacademy's Youtube Channel Wi