Libor dip may cut cos’ overseas funds cost

RBI Action May Infuse Up To Rs 50,000 Cr

THE stock market cheerleaders have more reasons to rejoice. Global money markets are beginning to warm up to borrowers while banks in India are being left with little option but to lend.
    For the first time, the three-month Libor (or, the London Inter-Bank Offered Rate), an international benchmark interest rate used to price corporates loans, has slipped below 1% — an indication that banks are more willing to lend. Corporate India may not only see its interest costs soften on all foreign loans, but could also find it easier to raise cheaper dollars to refinance the more expensive bridge loans they took to fund ambitious acquisitions.
    The global money market, which almost froze after the Lehman collapse, had turned risk averse, with bankers charging hefty premium over Libor. This premium, better known as a spread over Libor, is now expected to narrow. Indian companies have borrowed more than $70 billion from overseas markets in the past three years.
    In a move that could also lower interest rates on rupee loans, RBI on Tuesday announced that it would shut the second reverse repo window for accepting surplus funds from banks. With this, local banks would now be forced to lend as much as Rs 40,000-50,000 crore. If they choose to invest the surplus money in government or corporate bonds, it would lead to plummeting yields on these papers.
    From now on, RBI will conduct only one reverse repo in the morning while the afternoon reverse repo will be held only on reporting Fridays. But, it's the drop in Libor that could have a more far-reaching impact on financial markets, which are being fuelled by trillions of dollars that central banks across the world have pumped in. Libor's drop may pare cos' overseas liabilities
    BESIDES the series of rate cuts, the infusion of money to battle recession is also pushing the Libor to its natural level.
    Liquidity premium has been coming down in the international markets, with sentiment slowly limping back to normal," said Hemant Mishr, head of global markets for StanChart in India. "The movement in the Libor-OIS spread is another evidence that credit markets may be improving," he added.
    The Libor-OIS spread — a measure of banks' reluctance to lend — also narrowed on Tuesday to its lowest level since September 1. This number captures to what extent banks are comfortable with carrying risks of volatility in overnight rates. Libor, calculated as an average of the rates that banks charge each other for different periods and in different currencies, had surged to 4.82% after the Lehman collapse in September last year.
    Companies usually repay their loans on the basis of a floating rate that is a function of the 3-month Libor. For instance, a triple A-rated corporate would pay 400 basis points over the benchmark rate. With this rate falling dramatically, companies can now hope that their net overseas liabilities will come down. However, this would beneficial for companies that had not hedged the interest risk on their foreign currency borrowings.
    But not everybody feels that things would get better for Indian companies. Ajit Ranade, chief economist at AV Birla Group, said though the Libor has fallen, the credit spreads have not moved much.

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