Whalesbook
Foreign Borrowings Decline Sharply
Indian companies significantly cut back on foreign borrowing in the fiscal year ended March 2026. The trend was particularly sharp in March 2026, when foreign debt filings dropped by 51% year-over-year to $5.43 billion. This contrasts sharply with March 2025, when borrowings had reached a five-year high. This shift signals a major change in how Indian corporations are financing their operations.
Key Drivers: Rupee, Rates, and Hedging Costs
For the full fiscal year 2025-26, Indian companies raised just under $43 billion from abroad. This marks a significant 30% drop from the $61 billion raised in the previous fiscal year. The sharp decline is mainly due to challenging economic factors.
The Indian rupee's steady depreciation against the US dollar, falling nearly 10% in FY2026 and hitting a record low on May 15, 2026, made servicing foreign debt much more expensive. At the same time, global interest rates remained high through late 2025 and early 2026, with the US Federal Funds Rate around 3.50%-3.75% in April 2026, before showing signs of a potential easing later in 2026. These combined pressures reduced the cost advantage that foreign borrowing usually offers compared to domestic options.
Geopolitical Turmoil and Currency Pressure
While foreign debt levels fell, India attracted a surge in net Foreign Direct Investment (FDI) in February 2026, hitting its highest point in nearly four years. This suggests continued interest in long-term investment. However, the overall currency situation remains difficult.
The rupee's depreciation was made worse by the West Asia conflict, which began in late February 2026. This conflict caused significant market swings and pushed the rupee to a lifetime low. The weaker currency makes imports costlier and widens the country's trade deficit. This geopolitical tension also contributed to rising crude oil prices, which India imports heavily, further straining its balance of payments and weakening the rupee. Such uncertainties reduce companies' willingness to take on long-term foreign currency debt.
Regulatory Easing Efforts
The Reserve Bank of India (RBI) had introduced more flexible rules for External Commercial Borrowings (ECBs) in February 2026. These changes allowed more companies to borrow abroad, raised borrowing limits, and removed cost caps. The goal was to make it easier for companies to raise funds offshore.
However, these regulatory efforts have been overshadowed by current currency and interest rate risks. Earlier rule changes, such as an increase in borrowing limits in March 2025, had spurred activity. But, the market challenges in FY2026 proved more powerful.
High Costs Discourage Foreign Debt
The main obstacle to increased foreign borrowing is the rising cost, particularly for hedging against currency risk. While borrowing overseas is typically cheaper, the rupee's increased volatility – driven by geopolitical tensions and global economic fragility – has made hedging currency risks extremely expensive.
Estimates suggest hedging costs have climbed significantly, potentially wiping out the cost advantage of foreign debt. This makes the total borrowing cost in India very high. As a result, companies are preferring domestic debt, even if its stated interest rate is higher, due to its predictability and lower currency risk.
While the RBI considered offering more hedging support or easing rules during the West Asia conflict, no concrete policy changes were made. This may reflect a cautious stance or an acknowledgment that market forces are the primary driver. The sharp drop in borrowing indicates companies are delaying fundraising plans, unwilling to commit at current cost structures. Indian companies face a double risk from currency and geopolitical volatility, unlike those in more stable markets.
Outlook for Corporate Borrowing
Market watchers expect companies to remain cautious about foreign borrowing as long as geopolitical uncertainties continue. The combination of a volatile rupee, high global borrowing costs, and expensive hedging is likely to keep pushing Indian companies towards domestic funding.
Even though regulations have been eased, economic realities suggest a cautious approach to foreign debt until global markets stabilize and the currency becomes more predictable.