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Forex Losses, Rising Debt to Drag Indian Firms 1Q

Jun 25, 2012 7:08 AM   By Dilipp S Nag
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RAPAPORT... Most likely the first-quarter financial results from Indian firms will show a foreign exchange (forex) loss as the rupee has been hammered by U.S. dollar, according to a survey by the Associated Chambers of Commerce and Industry of India (ASSOCHAM). In India, the first quarter is generally April 1 through June 30.

Increased interest burden on account of sustained high cost of borrowing will be another drag on the balance sheet when companies release their results next month, the survey concluded. ASSOCHAM interacted with chief financial officers of 130 leading companies from diverse sectors, including banking, automobile, real estate, pharmaceuticals and fast-moving consumer goods (FMCG).

Except for FMCG, all other sectors are sensitive to interest rates and would have the most exposure to a stronger dollar.  ASSOCHAM stated that as per the accounting rules, the companies have to show, mark-to-market value of their exposures in foreign exchange,  mostly those with big foreign debts.

“With the rupee touching new lows almost daily and having lost about 25 percent in the last one year, the redemption costs of the external commercial borrowings (ECBs) have shot up,” according to the ASSOCHAM survey.

As the Reserve Bank of India (RBI) has largely disappointed India by retaining the tight monetary stance, rising interest cost is adding further to the debt burden of corporations. The problem can be further aggravated, if the apex bank along with the government does not step in to arrest the rupee's slide by direct or indirect measures, ASSOCHAM said.

“ASSOCHAM is hoping that the government would bring in some decisive policy measures to send an assuring message to the global investors so that capital outflows are reversed and fresh life is infused into the domestic currency,” the industry body said.

While there are positive developments, those benefits would not appear until the second quarter.  With the crude prices showing record downslide in the international market and the commodity prices moving lower in tandem, the raw material costs of several sectors, such as FMCG, are bound to come down.

ASSOCHAM stated that reports from the global commodity markets suggest that the raw material would enter a bearish phase with China easing and demand in several other markets receding. Various indices measuring the commodity prices, especially the futures market, would experience an advantage.

The business cycle would show the turnaround mood in the second quarter, according to ASSOCHAM. However, “we are keeping our fingers crossed and are looking upward on the sky for good monsoon, though delayed,” it concluded.
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Tags: 1Q, ASSOCHAM, Dilipp S Nag, Forex, Forex Losses, India, Rapaport, RBI, results, Rupee
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