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US Treasury rise: How it will impact Indian companies

Overseas borrowing by Indian companies may slow because of a likely increase in the cost of debt this year, with China's reported move to reduce its exposure to US Treasuries sending yields on the global risk-free proxy to a 10-month high.

The benchmark US Treasuries hit 2.59% after its biggest overseas backer reportedly decided to cut back on its holding of the instrument, but pared its losses partially to trade at 2.56% Thursday. Bond yields and prices move in opposite directions.

Bloomberg reported on Wednesday that China might slow down investment in US Treasuries, considered the safest debt-market bet because of the dollar's status as the global reserve currency and the instrument's short duration to maturity. China's State Administration of Foreign Exchange said in a statement Thursday that the report "might have cited wrong sources or may be fake news." It said investments in Treasuries are decided by market conditions.

In the past one month, the US gauge surged 17 basis points on concerns over rising oil prices. Global bond market doyen Bill Gross at Janus Henderson group, too, has declared a bond bear market this year, coinciding with a spurt in yields.

"An increase in rates has its own impact on costs as borrowers pay higher," said Ashish Vaidya, head of markets for India at Singapore's DBS Bank. "If capacity utilisation picks up, we are likely to see private sector involvement in capital expenditure. This will require funds, leading to higher demand for money – both in domestic and international markets."

The surge in domestic yields, too, could hit local corporate profitability as competition may not allow companies to pass on cost pressures to end-customers.

"Indian companies are likely to pay more for their overseas borrowing even as some of them will go for refinancing of existing borrowings," said Soumyajit Niyogi, Associate Director at India Ratings & Research. "Even syndicated bank loans will cost more as most of them are priced in line with the LIBOR. The surge in yields in the US and other countries, especially in short-term rates, will lead to a rise in other lending rates."

LIBOR, or London Interbank Offered Rate (six-month), has increased about 15 basis points to 1.87% in the past one month. A foreign currency loan is mostly priced with a spread tied to the LIBOR. A rise in the benchmark rate will naturally increase the cost of credit.

Domestic bond prices too will become costly as India cannot remain immune to the rising UST trend. Back home, the benchmark bond yield with the largest outstanding stock shot up 26 basis points from the second week of December.

"Overall, the move is going to be unfavorable as companies may find difficulties to pass both rise in input cost and financing cost to the end-consumers," he said.

India Inc's foreign borrowings saw an over six-fold increase to $3.04 billion in November, central bank data showed.

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