Rupee plunge hits dollar borrowing, masala bonds safe

For every dollar, state pays 11.4% per year due to currency depreciation and interest rates

Published: 09th July 2022 06:46 AM  |   Last Updated: 09th July 2022 06:46 AM   |  A+A-

Cash; Capital; investment

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Express News Service

KOCHI: Kerala, which has taken foreign currency loans from multilateral agencies like World Bank and Asian Development Bank (ADB), will have to bear higher costs due to the sharp depreciation of the rupee against the US dollar this year.

However, KIIFB’s ‘masala bonds’, through which the state raised Rs 2,150 crore in 2019, will not be impacted as it is a rupee-denominated bond and the foreign exchange fluctuations would not impact these, according to experts.

In June 2021, the World Bank approved a $125-million programme to support Kerala’s preparedness against natural disasters, climate change impacts, disease outbreaks and pandemics.

Similarly, ADB has provided $100 million to support Kerala’s additional skill acquisition programme in its drive to increase the employability of higher secondary and undergraduate students. French development agency Agence Francaise de Developpement (AfD) has provided 180 million euros for the Kochi Metro rail project.

The Indian rupee depreciated by 6.8% against the USD this year, from 71.51 on January 1 to 79.04 on July 7. Some research institutions have predicted the rupee to touch 81/USD by March next year.

“The depreciation of rupee against USD will have a negative impact on India’s public sector foreign currency loan of about $130 billion which is the total loans taken by all state governments and PSUs, and guaranteed by the Central government,” said Francis Mathew, chartered accountant and former senior financial control specialist with ADB. Private sector borrowing is not included in this $130-billion loan. “The financing cost of all USD borrowing of both private and public sector increased by 6.8%, in addition to the applicable interest rate,” he explained.

Rajesh Kumar Singh, additional chief secretary, finance, Kerala government, told TNIE that the rupee depreciation impact on the state’s finances will only be marginal.“Our external loans are less than 4% of our debt, so the impact is marginal,” he said. The AfD loans taken by KMRL will also become “slightly” costlier due to the rupee fall, Singh said.

In the long run, the rupee depreciated by 365%, from Rs 17/dollar in January 1990 to `79.04/dollar this year, averaging 11.4% per year depreciation. Simply put, for every dollar borrowed, the state is paying 11.4% every year on account of currency depreciation, in addition to the interest rates. Mathew said KIIFB’s masala bonds will not be affected by rupee depreciation. “Masala bonds are rupee denominated, so will not be affected by the depreciation,” he said.

A big positive in the foreign exchange fluctuation is the loans taken from the Japanese funding agency JICA. In 2007, Kerala has taken a loan of JPY 65,623 million (Rs 2,589.8 crore). “The rupee appreciated against JPY by around 14.70% in the last 12 months, so the borrowing cost is reduced,” says Francis Mathew, former senior financial control specialist with ADB


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