For companies with existing INR borrowings, engaging in carry trades to swap INR borrowings to US$ becomes a feasible option.
In the quest for energy security, Indian E&P companies have been bidding aggressively for oil and gas blocks abroad.
With large amount of surpluses generated through local operations, funding cash flows through internal accruals appears to be a logical choice.
However, funding expansion through US$ borrowings offer the following advantages:
- Lower US$ interest rates allows for reducing the debt servicing costs.
- US$-denominated borrowings offer a synthetic hedge against dollarized earnings given the nature of pricing of both crude oil and natural gas.
- US$-denominated borrowings also act as a net investment hedge thereby protecting the balance sheet from the impact of translation risk.
Issue of dollar bonds to fund investments in overseas blocks may prove to be an innovative technique to align the balance sheet structure.
For companies with existing INR borrowings, engaging in carry trades to swap INR borrowings to US$ becomes a feasible option as they reduce the interest cost and provide a synthetic hedge against both dollarized transaction cash flows and net investments abroad.
Carry trades can prove to be effective hedging tools, where:
- They are limited to the currency in which receivables are priced or denominated
- They are used to hedge translation risk on investments.
*Refer to the attached PDF for source information.