Foreign Borrowings

Context:

Indian companies´ foreign borrowings plunged 20.2 per cent to $23.33 billion in 2024, down from $29.22 billion a year earlier.

Foreign Borrowings

Foreign borrowings, also referred to as external debt, is borrowed money by a government, corporation, or household from another country. Foreign borrowings can either be short-term or long-term liabilities.

• Benefits of foreign borrowings
  • Access to capital
    • Foreign borrowings can be a cheap source of capital for investments.
  • Financing
    • Foreign borrowings can finance gross domestic investment.
• Risks of foreign borrowings
  • Debt crisis
    • Foreign borrowings can cause debt crises, especially in developing economies.
  • Economic growth
    • Foreign borrowings can slow economic growth, especially in low-income countries.
  • Financial market turmoil
    • Foreign borrowings can lead to financial market turmoil.
  • Exchange rate risk
    • A local currency depreciation can increase the default probability of a firm that borrows in foreign currency.
• Examples of foreign borrowings
  • Foreign currency borrowing
    • If a firm has borrowed money from elsewhere other than domestic currency.
  • Obligations to international organizations
    • If the government borrows from the World Bank, Asian Development Bank, International Monetary Fund among others

India Inc’s Foreign Borrowings Down in 2024

• Slump in Foreign Borrowings
  • 20.2% slide to $23.33 billion in 2024 from $29.22 billion in 2023.
• Effect of Currency Devaluation
  • Falling rupee value against the US dollar increases the cost of foreign loans for Indian corporations.
• Rising Cost of Borrowing
  • Repayment costs are high, and forward cover prices are rising with depreciation, forcing Indian companies to avoid foreign debt.
• Change in Strategy of Borrowing
  • Many Indian companies will reduce foreign borrowings owing to a high cost of overseas debt.
• Preference for Local Debt
  • Many Indian companies have been preferring to raise debt from local banks owing to the cost difference.
• Expert Opinion
  • Rabal Banerjee sees foreign loan outtakes to slow in 2025.