Essar Oil could sign a preliminary agreement with China Development Bank on Tuesday to borrow $1 billion during Chinese Prime Minister Li Keqiang’s visit to Mumbai, his first foreign trip, the sources said.
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The Indian firm, controlled by billionaire brothers Shashi and Ravi Ruia, has been replacing its rupee debt with lower-cost, overseas loans and has so far refinanced $481 million.
“As part of our initiative to dollarize our debt, we have been in discussion with several international banks, including Chinese banks. CDB is part of that conversation,” Essar Oil said in a statement on Monday in response to an article in the Economic Times. It declined to confirm the deal.
The group hopes to refinance another $1.8 billion within the next three to six months in an effort to cut by half its average interest burden of 11.5% on domestic debt”, Essar Oil Chief Executive L. K. Gupta had said on May 10.
Interest costs are high in India because of the steep rate increases made by the central bank to control inflation. The Reserve Bank of India (RBI) increased its policy lending rate by 3.75% points between March 2010 and October 2011. Easing inflation has allowed it room to unwind some of those rate increases, it lowered the rate by 1.25% point starting April last year, but still local interest rates are considered high.
Cheaper loans in China are attractive for Indian companies. In October 2010, Reliance Power got a commitment of $12 billion of loans from Chinese banks after it ordered power equipment and services from Shanghai Electric Group.