Introduction

The article discusses how the recent spike in the US benchmark interest rate called the Secured Overnight Financing Rate (SOFR) to over 5% could impact India’s ability to raise foreign capital. It also hints at potential stress in the US banking system.

Analysis for Layman

The SOFR rate is decided based on interest rates in a segment of the US financial market where banks borrow money from each other overnight using government bonds as collateral. It is used to price many US dollar loans and derivatives globally. If SOFR rises, it becomes expensive for Indian companies to borrow dollars overseas.

The article says the high SOFR rates could signal funding issues for US banks, similar to the 2019 crisis. This is happening as the US central bank is draining money from the system. Some US banks failed earlier this year due to losses on bonds amid rising rates.

Original Analysis

The volatility in US money markets that is driving up dollar funding costs spells uncertainty for Indian firms looking to tap overseas loans or issue foreign currency bonds. Already, $25 billion of overseas fundraising is slated in 2023. Higher hedging costs and foreign loan rates could dampen these plans.

Sectors dependent on dollar loans like infrastructure, housing finance firms, and renewable energy players will be impacted. Stress on US banks may temporarily reduce risk appetite of global lenders. However, India’s growth outlook remains strong and foreign capital will likely flow selectively.

Impact on Retail Investors

For retail investors in India, the developments highlight the risks of investing in stocks overly dependent on foreign capital inflows. Companies in capital-intensive sectors that are looking to expand via dollar loans may face higher financing costs, tighter credit supply, and project delays if the situation in US funding markets worsens. This can impact their stock valuations and investor returns.

When investing, retail investors must focus on quality firms with healthy balance sheets and domestic funding access. Export-oriented sectors like IT and pharma face currency risks but also stand to benefit if the rupee weakens temporarily versus the dollar.

Impact on Industries

The infrastructure, housing finance, renewable energy, aviation, and auto sectors in India could witness higher cost and tighter availability of dollar loans affecting project viability. This may get reflected in stock prices of companies in these sectors.

Sectors not directly dependent on overseas loans like manufacturing, FMCG, agriculture, chemicals, and domestic financial services could see a relative upside as money moves away from rate-sensitive stocks. The software/IT, pharma, and healthcare services sectors could benefit from currency depreciation.

Long Term Benefits & Negatives

Over the long run, volatility in US funding markets may nudge India towards reducing over-reliance on dollar capital flows by encouraging rupee-based financing and local currency settlements. This will reduce systemic risk. Policy reforms around rupee internationalization have already begun.

However, higher hedging costs and dollar funding rates may affect competitiveness in some export-oriented sectors. Knowledge-based sectors like IT and pharma though remain cost-competitive for now. Some slowing of capital-intensive infrastructure projects possible if the funding environment remains difficult.

Short Term Benefits & Negatives

In the near term, volatility and stress in US funding markets could spark safe haven capital inflows benefiting Indian stocks and bonds. However, this may reverse quickly. Currency depreciation may aid exports briefly but also stoke imported inflation.

Tighter global liquidity would increase finance costs for domestic firms. Costlier dollar loans can affect working capital cycles and stall projects temporarily. Profitability could dip for rate-sensitive sectors. Banks may turn cautious lending overseas.

Companies That May Gain

Export-oriented sectors like IT (TCS, Infosys, HCL Tech) and pharma (Sun Pharma, Lupin, Cipla); Domestic consumption firms (HUL, ITC, Britannia); MNC banks (HSBC, StanC); Companies with a natural hedge via dollar exports and imports (RIL, ONGC).

Companies That May Lose

Infrastructure/construction (L&T, Adani Enterprises); Housing finance (HDFC, LIC Housing); Aviation (Indigo, SpiceJet); Auto/auto ancillary (Maruti, M&M, Bajaj Auto); Consumer discretionary/durables (Asian Paints, Titan); Renewable energy equipment (Suzlon, Adani Green).

Additional Insights

The developments highlight the balance of payments risks for emerging economies relying excessively on foreign capital flows. India must continue boosting exports while also channelizing domestic savings to fund investment via rupee bonds and loans. Policy efforts underway on this front may get an added push from the external volatility.

Conclusion

Bhaskar Dutta, ET Bureau. (2023, December 7). What Does Rise in US Funding Rates Mean for India? The Economic Times.