The fall of the rupee against the dollar is hitting hard the Indian companies that had relied on the relatively cheaper dollar funds to fund their growth in the boom time. Telecom major Reliance Communications' debt stood at Rs 25,820 crore on December 31, 2008. It was Rs 17,440 crore at the end of March 2007. Significantly, about 70 per cent of the debt is in foreign currency. "Although the company has benefited in terms of competitive interest rates on foreign currency debt, adverse movements in currency rates have affected its financial profile," says a release by credit rating agency ICRA on Reliance Communications. As the rupee continues its downward march, many companies are faced with the prospect of an inflated debt on its balance sheet.

Till early 2008, companies which had left their foreign currency positions unhedged had emerged gainers. As the rupee appreciated against the dollar to below-40 levels, their dollar debt fell significantly in rupee terms. But in 2008, the rupee was the second worse performing currency, falling 19.2 per cent against the dollar. This calendar year, it has already seen a markdown of 5.7 per cent, says a Kotak Mahindra Bank research report. "For a lot of companies whose debt is largely in dollars, repayment obligations would increase in a similar magnitude if they have left their positions open," says Vikas Aggarwal, senior vice-president, ICRA.

Companies that have hedged their currency risks are safe to the extent of the cover. "But we see that it is difficult to hedge oneself on long-term loans fully as the market is very illiquid and one does not get good rates and quotes for that," says the chief financial officer of a large public sector bank. Also, there was the belief that the rupee would appreciate.

Many companies borrowed using foreign currency convertible bonds. FCCB is a debt instrument with an option to convert to equity. But if this option is not exercised, it remains as a bond to be repaid on maturity. "Given the buoyancy of the stock market, the issuers would have expected the bonds to be converted into equity. And expecting this conversion, most companies would not have hedged these positions," says the treasury head of a private sector bank. Between 2004-05 and 2007-08, Indian companies are estimated to have raised about $20billion through FCCBs.

The erosion in FCCB prices prompted the Reserve Bank to allow Indian companies to buy back them. "However, due to limited funding, companies have found it difficult to buy back FCCBs. Reports indicate that just 9 of the 156 companies that raised FCCBs have exercised the premature buyback option so far," says a Citigroup report. Companies are not allowed to borrow from Indian markets to buy back these bonds. With other funding sources drying up, they would have to turn to banks to help them repay the loans on maturity.

Meanwhile, a Kotak Mahindra Bank research report expects that "by end-December, the rupee would recover to 50.5-52 a dollar." According to a Credit Suisse research report, "beyond 2009, the rupee could rally below 50 per dollar, as capital inflows potentially pick up and growth accelerates."

The uncertainty about the direction of the rupee has resulted in companies hesitating on taking a hedging call. Says Aggarwal, "Companies are wondering whether to hedge at current levels because what if the rupee comes back to 48 level. A prudent company would be one that is largely hedged."