Bonanza for Indian euro loan borrowers as currency slides against dollar

Companies will have to buy fewer dollars to repay euro debt

Indian companies that have raised euro-denominated debt will have to repay less at maturity and while servicing interest, as the European currency has weakened against the dollar and is now at a par with the greenback for the first time in 20 years.

Foreign exchange experts said Indian firms will have to buy fewer dollars while repaying the Euro loans and will save on interest cost as well. The European currency has weakened by 12 per cent to the greenback since this January, while the rupee has shed 7 per cent. On Thursday, the dollar and the euro were trading at the same level vis-a-vis the rupee.

Indian companies usually prefer to raise funds from the US markets due to lower interest rates but some firms such as Reliance Industries and PFC had raised debt in euro in the past, according to data collated by Bloomberg (see chart). Last September, PFC raised €300 million debt to invest in renewable energy projects. The Euro-denominated offer was oversubscribed by 2.65 times, showing high investor interest in the green bond.

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“The weakening of the euro versus the dollar is good news for Indian companies that have borrowed in the European currency. But this advantage may get neutralised to some extent if the Indian company’s earnings are in local currency, as the rupee has also weakened versus the dollar,” said Prabal Banerji, former group finance director of the Bajaj group.

Euro-denominated debt helps Indian firms diversify both their currency book and investor base in Europe. Of the $9.7 billion raised as green bonds for renewables in 2021, Euro-denominated debt contributed about $3 billion as more independent power producers turned to bonds for refinancing portfolios of commissioned projects. A large part of India's $233 billion funding requirement over the next eight years for the renewable sector will be raised in euro as interest rates tighten across the world.

The euro has weakened mainly due to a series of aggressive interest rate hikes by central banks across the world, including the US Fed which has hiked interest rates by 75 basis points. The war in Ukraine and slowing economic growth will keep pressure on the euro as investors turn to the US greenback as a safe haven, say analysts. The US Fed plans to raise rates in July, analysts said. The dollar would strengthen further if Europe and the US enter recession.