Indian companies are queuing up for dollar loans as soft US interest rates and a fall in the cost of hedging foreign exchange exposures have made overseas borrowings cheaper than local rupee debt.

This has dented supply in the domestic primary debt market, even though yields are near historic lows, and compressed spreads -- the difference between the yields on corporate and government bond yields -- in the secondary market.

Blue chip companies including National Thermal Power Corp, Hindustan Zinc, Grasim Industries and BSES Ltd are in negotiations to raise at least $700 million in the next few weeks, merchant bankers said.

"Many firms are considering overseas borrowings. Low dollar interest rates and the low cost of hedging the currency risk are the main drivers," said Vishnu Deuskar, ABN AMRO Bank's country head, financial markets, India.

The US federal funds rate has fallen by 525 basis points since the beginning of 2001, against a 300 bps fall in the the equivalent Indian repo rate.

The premium on the one-year forward dollar has dropped to 1.93 per cent from 5.72 per cent 12 months ago, tracking a 1.13 per cent appreciation by the rupee against the dollar in the same period.

Indian companies can now raise five-year dollar loans at 5.25 to 5.5 per cent interest, including the cost of hedging and taxes, compared with a minimum of 5.7 per cent at which top-rated firms can expect to raise five-year funds from the Indian bond market.

The total cost of borrowing consists of the five-year dollar-rupee swap rate , which is the LIBOR plus the forward dollar premium, the spread over LIBOR, which will depend on the company's rating, and a withholding tax of about 10 to 20 per cent of the interest rate.

Indian companies raised funds over the past month at 70 to 100 basis points over the six-month LIBOR, now at 1.21 per cent.

MIOCS hit a life low of 3.02/11 per cent on May 20, a day before aggressive central bank intervention arrested the rupee's sharp rise. MIOCS closed at 3.79/89 per cent on Friday.

LIC Housing Finance reported late last month that it had raised $50 million for five years at rates as low as three to 3.5 per cent.

Merchant bankers said there were no primary issues expected in the domestic currency market till at least mid-June.

The lack of fresh issues has left very few quality papers in the secondary market, which has compressed spreads.