While the latest rate hike may not deter Indian corporates from borrowing from Japan, further rate hikes could force them to reconsider their plans.
Last week, the Bank of Japan raised its interest rate for the second time in 17 years in another step away from its long-standing ultra-loose monetary policies, setting an interest rate of 0.25%, up from 0-0.1%.
“Japan was increasingly becoming an appealing source of capital for Indian firms plagued by tight liquidity, high borrowing costs and elevated risk premiums in domestic markets. Markets in the US and Europe were constrained in their appetite for emerging markets owing to decreasing yield spreads between the investor and investee countries, unlike in Japan,” said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.
“But this situation is rapidly changing, with Japan tightening its monetary policy outlook, at a time, when other nations are turning dovish,” he added.
In the recent past, Indian companies, public sector non-banking financial companies (NBFCs), as well as the government, have been increasingly reliant on Japanese loans for their fund-raising purposes due to low interest rates.
Among companies, JSW Steel, Rural Electrification Corporation (REC), Power Finance Corporation (PFC), and Housing and Urban Development Corporation (Hudco) have cumulatively raised yen-denominated debt upwards of ¥200 billion (about ₹11,000 crore) in the past 11 months, according to publicly available company disclosures.
These include loans as well as bonds. The largest amongst these was REC, which has raised about ¥153 billion ( ₹8,390 crore), since January 2024, in three separate debt facilities.
Among governments, this April, the Tamil Nadu state government opted for a loan of $300 million in yen from the World Bank for developing urban water and sanitation services, as per a World Bank disclosure.
Last week, state-run PFC announced it secured a long-term loan worth ¥25.5 billion from the Japan Bank for International Cooperation (JBIC) to finance a 300.3 MW wind energy project in Karnataka.
Another public sector lending major, Hudco, recently tied up for yen-denominated ECB (external commercial borrowing) worth $400 million.
Hudco plans to raise about $1 billion through ECBs, part of which would be yen-denominated.
“So far, almost all public sector NBFCs have been going for yen-denominated ECBs. It has been beneficial for us as it’s better compared to other currencies,” said a top official with a public sector NBFC on condition of anonymity.
“In case of a cut in Fed (US Federal Reserve) rates, NBFCs would explore the market further. Ultimately it’s the cost that matters,” the official added.
Incidentally, last week, the Bank of Japan’s deputy governor, Shinichi Uchida played down the chance of a near-term hike in borrowing costs.
The comment by the deputy governor came days after the rate hikes amid signals from the Bank of Japan governor KazuoUeda that more rate hikes can be expected.
While India’s external debt-to-GDP ratio, at 20%, is one of the lowest among major economies, about 11-12% of the country’s external borrowing is from Japan, making it one of India’s largest bilateral creditors, said Sujan Hajra, chiefeconomistand executive director at Anand Rathi Shares and Stock Brokers.
“A significant portion of this debt consists of official development assistance (ODA) loans provided by the Japan International Cooperation Agency (Jica) for infrastructure and development projects. As such, a rise in interest rates in Japan is unlikely to significantly impact corporate borrowing by Indian entities,” he said.
“However, an increase in Japanese interest rates, coupled with the strengthening of the yen, could raise the debt servicing burden for Indian corporates with yen-denominated loans, particularly those with unhedged positions,” Hajra added.
Incidentally, Jica has been funding important infrastructure projects in India, which include the Dedicated Freight Corridor Project, the Mumbai-Ahmedabad High-Speed Rail Corridor, the expansion of metro networks in several Indian cities, as well as sewage and water supply projects, among others.
Usually, ODA loans come on concessional terms, and fluctuations in Japanese interest rates should not materially affect bilateral flows of such funding.
“The ODA loan and private sector investment finance from Jica to India till date has been closer to ¥7.5 trillion. Most of these are long-period loans, carrying a low and fixed interest rate, and are unlikely to have a significant impact on borrowers, including the government. The floating interest rates are based on the six-month Tokyo Term Risk-Free Rate (Torf) and spread. While the spread remains during the life of the loan, the base rate (TOFR) will change with evolving dynamics in the Japanese economy,” said Devendra Kumar Pant, chief economist at India Ratings & Research.
“The impact of the interest rate hike will mainly be felt through two channels: strengthening of yen vis-a-vis the rupee, impacting interest and principal repayment, and current account through trade deficit…At present, the impact is unlikely to be significant. However, if rate hikes continue, which is likely to strengthen the yen vis-a-vis the rupee, the impact could be higher,” he added.
In response to a query from Mint, an REC spokesperson said, “REC has been fixing its JPY (yen) floating rate borrowings through various hedging structures. We don’t see any impact of increase in cost and the cost of JPY borrowing at present also is cheapest amongst all sources and we are tying up for further loans in JPY for REC.”
Of the total foreign currency borrowings of REC of $16.6 billion equivalent, nearly 18% or $2.9 billion equivalent of total foreign currency borrowings are with yen underlying, according to the REC spokesperson. All the yen borrowings have been hedged for currency risk up to maturity. A sizeable portion of the same is through fixed rate bonds or with coupon only swap wherein no impact will be there in case of any change in policy rates.
The spokesperson also said that REC while evaluating any foreign borrowing proposal considers the cost on hedged basis—which is cheaper as compared to alternate domestic sources by about 80-100 basis points.
“For the JPY floating benchmarks also, REC had considered the cost, basis the fixed swapped rates. Considering that JPY benchmark has been near-zero for a long duration of time, REC has been able to save a significant cost, and also even after recent increase in rates, the landed cost to REC is lower than that estimated by REC at the time of evaluation, due to favourable swap levels,” the spokesperson added.
The spokespersons of the Union finance ministry and Jica didn’t respond to emailed queries. Spokespersons of JSW Steel, PFC, and Hudco did not respond to emailed queries till press time.
