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When a housing finance company, which has no export income, borrows money in foreign currency, because it’s cheaper to borrow from overseas and/or it’s easier to borrow in forex because of right money conditions in India, it’s playing with fire.
Back in 2007, there were many Indian companies with INR income which borrowed money in Forex using foreign currency convertible bonds (FCCBs). It ended up in disaster. Read this to see what happened to those companies: bit.ly/2DTU0U8 and bit.ly/2Wt7mhu.
As INR depreciated against USD and other foreign currencies, many of those companies found to their horror that their liability to pay back the money had soared in INR terms. Almost none of these bonds were converted as stock prices fell well below conversion value.
The argument that “this time it’s different” because these are not convertibles doesn’t hold. The argument that the borrowing cost can be hedged also doesn’t hold because there is no perfect (and cost effective) hedge out there.
Moreover, to me, the whole idea of borrowing money in forex when all your business is in India just does not make sense from a “conservative risk management” point of view.
Maybe I am being old-fashioned here but whenever I see a business do this, I get palpitations...
