The weakening rupee has started impacting Indian corporates that have gone for foreign currency borrowings, compounding concerns at a time when trade wars and economic slowdown are casting a shadow over global growth prospects. The five per cent depreciation in the rupee since April 2024 has directly increased the rupee equivalent of debt repayment for companies relying on external commercial borrowings (ECBs) by the same percentage, pinching the corporate sector.
There could be more trouble in the offing as there are clear indications from the RBI that it may not be averse to the idea of a steady depreciation in the rupee in line with other currencies. RBI Governor Sanjay Malhotra last week said the RBI’s interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band.
When the interest rate differential between the US and India was nearly 5 per cent in 2020, foreign loans were more attractive than rupee borrowing. However, that’s not the case now. With the U.S. Federal Reserve hiking rates and the dollar appreciating, this advantage has eroded and the foreign loans have started haunting Indian firms which have failed to hedge the risk. As the rupee has depreciated by 3.2 per cent in the last three months, a company which has borrowed Rs 2,000 crore overseas – mostly unhedged – will see the slide squeezing them hard of late. If the loan of this company is five years old, the depreciation burden will shoot up by over 22 per cent in addition to the interest of 6.6-7 per cent per annum.
“For instance, a company with $500 million in ECBs would see an additional Rs 2,500 crore burden if the rupee weakens by 5 per cent (assuming Rs 75 per USD as the base),” said Amit Pabari, MD, CR Forex Advisors. The combination of rising US rates and a weaker rupee has significantly increased the cost of servicing foreign loans, making them riskier and less appealing. Indian companies need to pay more rupees to service their foreign currency loans.
The rupee has depreciated by over 22.36 per cent from 71.51 against the dollar in the last five years. This means the additional outgo on account of rupee depreciation will be the same percentage.
The burden on companies could be substantial as cumulatively, there were 1,221 ECB registrations valued at $49.2 billion in 2023-24 as against $26.62 registrations by 1,102 entities in the previous year, the RBI said. While 70 per cent of ECBs raised during 2023-24 were effectively hedged in terms of explicit hedging, rupee denominated loans or loans from foreign parents, limiting the impact of external shocks, depreciation will burn the remaining 30 per cent.
“Obviously, corporates which have availed forex loans and have not hedged the risk, would incur additional cost to the extent of rupee depreciation, making forex loans much costlier than the rupee borrowing. Also, reduced probability of rate cuts by the US Fed will keep the interest benchmark higher,” said Dipti Chitale, Director, Mecklai Financial, a consultancy company providing treasury risk management services.
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The Indian rupee has depreciated by over 20 per cent over the past five years, creating a mixed impact on corporates. Exporters have largely remained resilient, benefiting from higher rupee-denominated revenues. Additionally, with the forward premium dropping from 4.5 per cent to 2.5 per cent due to a reduced interest rate differential, many exporters were opting for minimal hedging, keeping hedge ratios low, Pabari said.
However, importers are facing mounting challenges. Most hedge short-term liabilities for 1 to 3 months, and the sharp depreciation of the rupee has significantly raised their import costs, squeezing profit margins. Sectors with heavy import reliance, such as oil and gas, electronics, and pharmaceuticals, are seeing higher cost pressures, which could eventually be passed on to consumers.
To counter the rupee volatility, importers are raising their hedge ratios despite higher hedging costs. “This strategy helps limit forex losses but adds to operational expenses. Some firms are also shifting to domestic financing to reduce forex exposure,” Pabari said, and added that companies are also reassessing their pricing strategies, passing on cost increases to consumers where feasible.
“Clearly USD/INR volatility has made a comeback and is here to stay. So, corporates are relatively keener to hedge the risk. They are also more open to explore hedge instruments like options (in addition to simple forward covers) due to the nature of volatility,” Chitale said.
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In industries where pricing power is limited, businesses are focusing on operational efficiencies and cost-cutting measures to absorb the impact. While exporters enjoy a natural hedge, the broader corporate sector—especially those with high foreign debt or import dependency—continues to navigate rising costs and currency risks in an increasingly volatile environment.
The additional cost due to rupee depreciation on overseas borrowing in the last three years can be substantial. The Indian rupee (INR) depreciated by 3.2 per cent to 87.45 against the US dollar since November 6, 2024, the day the presidential election results were announced in the US, largely mirroring the 2.4 per cent appreciation in the dollar index during the same period. The RBI has used the forex kitty to prevent a crash in the rupee.
The country’s foreign exchange reserves have fallen by $51.52 billion to $630.607 billion as at February 1, 2025 from $682.130 billion as at November 1, 2024, reflecting the heavy intervention (dollar sales in the spot and forward markets) by the RBI in the forex market to curb rupee volatility.
The impact of rupee depreciation on Indian companies varies depending on the sector they operate in. Export-oriented sectors like IT, pharmaceuticals, textiles, and automobiles tend to benefit from a weaker rupee, as their exports become cheaper and more competitive in the global market. On the other hand, import-dependent sectors like oil and gas, and companies that rely heavily on imported raw materials, are negatively impacted by rupee depreciation. This is because imports become more expensive, leading to higher input costs and reduced profit margins.
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“Export oriented businesses may fetch some benefits of weaker rupee for being competitive. However, industries relying on imported raw materials will face pressure on profitability, and some of the impact can be passed on consumers, which may lead to an increase in inflationary pressures,” Chitale said.
