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Borrowers shift back to domestic markets as global conditions turn volatile

For Indian firms it is back to borrowing in India as overseas borrowings through ECBs was down Q2’22 by 20 percent as global liquidity tightening and volatile currency made external commercial borrowings (ECB) expensive. This also explains the pick-up in domestic credit.

Borrowers across sectors availed overseas loans worth $3.7 billion during April-June’22, down 20 percent from $4.6 billion in the same period a year ago.” Tightening global liquidity and an increase in offshore borrowing costs likely impacted the appetite for external commercial borrowings in early FY23 after a rise in FY22, besides an under-pressure currency adding to costs” Radhika Rao, DBS, chief India economist at DBS.

The first quarter of the current year had turned out to be an extremely volatile period in recent times, both the onshore interest rate regime and Rupees turned out to be big headwinds for the ECB. “Another challenge is, ECBs are linked to 6 months or 1 year rates floating rates, and these short-term rates have gone up more than the long term” Soumyajit Niyogi, India Ratings

With tighter global liquidity conditions, volatile currency markets as well as uncertainty due to the Russia-Ukraine war borrowers are seeing comfort in domestic markets. ” As interest rates continue to go up both locally and globally, corporates will assess what will give them the best benefits,” said Rajiv Anand, Deputy Managing Director, . ” Given the fact that a lot of arbitrages are reducing, the demand for bank loans will rise.”

This is reflected in the latest bank credit numbers as well. April-July credit growth was 4 percent compared to a contraction of 0.4 percent in the same period, a year ago. ” Meanwhile domestic bank credit growth quickened in the Jun quarter, with loans to the industry up 8.7% y-o-y, alongside farm and service sectors which also registered notable increases” Rao said.

Besides market factors like rupee and liquidity conditions, there are some structural factors contributing to a slowdown in overseas borrowings. Lenders in the West have become very sensitive to ESG factors, especially environmental, which is also a challenge for sectors highly relevant to environmental concerns, like conventional energies. “I believe, rates and currency are more of cyclical factors, whereas ESG is structural,” Niyogi said. ” Large borrowers are gearing up to the global ESG compliances , whereas many medium sized borrowers will be back to domestic sources”.

Going forward, the Reserve Bank’s relaxation of ECB rules in July after the rupee touched new lows, could revive interest in overseas loans. ” As part of steps to spur capital inflows, the ECB borrowing limit under automatic route was raised in July, which might have helped attract interest in 2QFY” Rao said.

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