The recent depreciation of the Indian rupee has significantly impacted domestic companies with foreign currency loans. Since April 2024, the rupee has weakened by approximately 5%, directly increasing the rupee-denominated cost of servicing external commercial borrowings (ECBs) by the same margin. This escalation in debt repayment costs poses a substantial financial strain on companies that have relied on foreign loans.

 

The Reserve Bank of India (RBI) has indicated a tolerance for a gradual depreciation of the rupee, aligning with global currency trends. RBI Governor Sanjay Malhotra emphasized that the central bank does not target a specific exchange rate level but focuses on mitigating excessive volatility. He stated, "The exchange rate of the Indian rupee is determined by market forces."

 

The depreciating rupee, coupled with rising U.S. interest rates, has made foreign loans more expensive for Indian firms. The increased cost of servicing foreign debt in rupee terms adds pressure to corporate cash flows and elevates financial risks. Consequently, many companies are reconsidering their foreign borrowing strategies. In 2024, Indian firms' foreign borrowings declined by 20.2% to $23.33 billion from $29.22 billion in the previous year, reflecting a cautious approach towards overseas debt amid currency volatility.

To manage the risks associated with currency fluctuations, financial advisors recommend that companies employ robust hedging strategies. These may include forward contracts, options, and other financial instruments to mitigate the impact of adverse currency movements on debt obligations. Additionally, firms are advised to explore alternative funding sources, such as domestic borrowings, to reduce exposure to foreign exchange risk.