The widening current account deficit (CAD), which is projected to cross 2.6 per cent of GDP this year, coupled with the rupee plunge, is likely to increase borrowing costs for corporates and bring down the overall volume of fresh forex loans, says a report.
By losing over 9 per cent year-to-date, the rupee is the worst performing among major emerging markets currencies. The currency plumbed a new closing low yesterday at 70.15 against the American dollar.
The rising CAD and crude prices and the falling rupee have spiked the June quarter CAD to 1.9 per cent against 0.9 per cent in the year-ago period, and the same is projected to scale 2.6 per cent by March.
“A widening CAD, weakening rupee, coupled with rising interest rates, and forward premium can impinge on the ability of corporates to tap foreign markets to raise debt capital. For instance, annualised forward premium on the three-months rupee-dollar futures contract rose to 4.36 per cent on August 21 from 3.46 per cent on March 31, 2018, reflecting a commensurate rise in hedging costs,” India Ratings noted in a report on Tuesday.
Similarly, higher capital outflows and widening CAD will increase the credit spreads, it warned.
The widening CAD is accompanied by an increase in capital outflows (USD 5.5 billion so far in FY19) primarily from debt capital markets, it said, adding this can further worsen the demand-supply mismatch in debt markets, thereby widening credit spreads over the near to medium term.