As we all know, all importers can borrow cheap funds coupled with LIBOR, but ever wondered, how LIBOR affects the cost of borrowing and what happens to capex transactions LIBOR rates?
All the above queries will be answered in this blog.
All the foreign currency loans are borrowed either in LIBOR/EBOR; hence any movement in their rates will yield to expensive cost of borrowing in India.
Impact of LIBOR on Importers
Scenario 1: - If an Indian Importer had availed Buyers Credit of $100K for 180 Days in the Month of September’17, Client will pay 6ML @ 1.51% , This event is before FED meeting held in Dec’17.
Scenario 2: - If an Indian Importer wish to avail Buyers Credit of $ 100K for 180days in the Month of Feb’18, Client will pay 6ML @ 2.03%
BC availed in month of September’17 is cheaper by 0.53%, for same tenure and same amount
Reason for LIBOR rate increase
LIBOR is on move since 2016 due to continued rate hikes from US Federal Reserve. In fact, commentary for this year from US FED Chairperson - Janet Yellen is hawkish too and we can expect 3 rate hikes for FY18-19.
Fed still continues to attain a balance between responding to positive news on growth and unemployment that fostered a gradual tightening, while at the same time, signalling caution due to the continually weak inflation readings that have confused policy makers. 25 Bps were hiked on 14th Dec’17, following which LIBOR rates were increased
Lowest & Highest LIBOR rates reported in Past 30 Yrs. were respectively on-
Oct’15 – 0.32%
Mar’89 – 11.06%
Please find the attached historical LIBOR movement for the past 30 years.
How to protect businesses from LIBOR movement
If exposed to EUR/CHF currency, move invoicing/dealing in those currencies.
For Capex transactions, hedge LIBOR rates on the date of borrowing for entire tenure.
Evaluate overall cost of funding with Indian lending rate , i.e. net cost post adding forward premiums.
You can always reach out to us for more clarity on above @ www.savedesk.co