Hedging creates certainty in repayment obligations....

 Indian businesses can benefit from lower external borrowing costs and Masala bonds primarily by accessing a new pool of capital at potentially lower rates. When combined with strategic hedging using currency derivatives, they can minimize foreign exchange risk, increase financial stability, and free up capital for core business activities.

Benefits from lower borrowing costs and Masala bonds

Lower borrowing costs through external sources like External Commercial Borrowings (ECBs) and Masala bonds directly boost an Indian company's financial health.

Access to competitive rates: International interest rates are often lower than domestic rates, allowing companies to reduce their overall cost of capital. This makes new projects more profitable and improves a company's bottom line.

Reduced currency risk with Masala bonds: Unlike traditional ECBs denominated in foreign currencies, Masala bonds are rupee-denominated. This shifts the currency exchange risk from the Indian issuer to the foreign investor, protecting the Indian company from losses if the rupee depreciates.

Diversification of funding sources: Tapping international markets allows companies to diversify their funding beyond domestic banks. This is particularly valuable during periods of tight domestic liquidity.

Access to a broader investor base: Issuing Masala bonds on international exchanges, such as those in London or Singapore, gives Indian companies access to a wider pool of foreign investors. This can increase demand for their debt and potentially lower borrowing costs.

Increased financial flexibility: Longer maturity periods, often available with ECBs and Masala bonds, give companies more flexibility for long-term strategic planning and capital-intensive projects.

Benefits of hedging external borrowing with currency derivatives

For companies that choose foreign currency ECBs, hedging with derivatives is a crucial strategy for mitigating the currency risk and securing the low-cost borrowing benefits.

Derivative strategy    

How it benefits Indian businesses

Forward contracts      

Allows a company to lock in an exchange rate for a future date, creating certainty for its future payments. This is suitable for managing transaction-specific risks like an upcoming loan repayment.

Currency swaps          

Enables a company to exchange a foreign currency liability for a domestic one for a specified period. This offers a longer-term hedge against exchange rate volatility by effectively converting a foreign currency loan into a rupee-denominated one.

Currency options       

Gives the company the right, but not the obligation, to buy or sell a foreign currency at a predetermined price. This offers protection against an unfavorable movement in the exchange rate while retaining the ability to benefit from a favorable movement.

Synergistic benefits and strategic outcomes

By combining the lower costs of external borrowing with astute hedging strategies, Indian businesses can unlock several strategic advantages.

Enhanced balance sheet stability: By mitigating the risk of large, unpredictable liabilities from currency fluctuations, companies can protect their balance sheets and credit ratings. This financial stability signals strength to investors and creditors.

Hedging creates certainty in repayment obligations. With more predictable cash flows, a company can better plan for future investments, expansion, and operations. The combination of a lower cost of capital and stable financial planning enables companies to price their products and services more competitively, both domestically and internationally. Diversifying funding and hedging against currency risk reduces a company's sensitivity to domestic interest rate cycles and market conditions. A proactive approach to risk management enhances an Indian company's appeal to foreign investors. It demonstrates sophisticated financial management, which can further open doors to more international capital.