The Reserve Bank of India's forex swaps have created a significant opportunity for Indian firms to access dollar funding at lower costs through cross-currency structures. According to The Hindu BusinessLine, the central bank's billions of dollars in FX swaps have shifted the economics of cross-currency funding, making currency swaps a more attractive route for raising dollar funds. The RBI's strategy of draining surplus liquidity through dollar-rupee swaps has spurred a jump in FX forward premiums, which directly benefits companies using currency swap mechanisms to convert rupee borrowings into dollar funding.
The strategy offers significant cost advantages compared to traditional dollar borrowing, with recent developments making it even more attractive. As reported by The Hindu BusinessLine, rupee-dollar swap pricing has jumped across tenors, with implied rates for two-, three-, and five-year swaps rising 90 to 110 basis points. The favorable economics stem from surging US Treasury yields underpinned by inflation pressures, oil prices and resilient economic activity along with expectations of more Federal Reserve rate hikes this year. According to Sameer Karyatt, managing director and head of trading at DBS Bank India, borrowing in rupees and using the forward market to convert liabilities into dollars would result in a lower all-in US dollar funding cost than direct overseas borrowing.
Banks are actively approaching corporate borrowers with structured approaches that combine domestic rupee instruments with currency swaps. In two recent structures seen by Reuters, companies could convert rupee borrowing into dollar funding at rates below the prevailing US dollar funding rate, with the discount varying by tenor. Corporate borrowers are typically looking for up to three-year tenors, while asset-liability desks at banks are considering longer-dated structures to raise dollar funding for overseas and GIFT City branches, according to a senior treasury official at a foreign lender. The strategy is particularly suitable for companies with dollar revenues or offshore operations that can better absorb currency exposure.
RBI rules allow Indian companies that meet minimum net worth and adequate risk management eligibility requirements to use currency swaps to transform rupee liabilities into foreign-currency exposure. As reported by The Hindu BusinessLine, the strategy involves companies raising rupee debt in the domestic bond market first, then entering a currency swap with a bank to convert rupee cash flows into dollar cash flows. This approach effectively turns a rupee loan into a dollar loan without borrowing directly from overseas lenders, with the forward premium difference between MIFOR and SOFR having increased to around 3-3.50%, up from the previous 2.50-2.75%.
Despite the cost advantages, the strategy carries significant mark-to-market risks that vary by implementation structure. As reported by The Hindu BusinessLine, the extent of cost advantage would depend on the customer's credit rating and the relative borrowing spreads available in the domestic and overseas markets. The value of currency swaps can move sharply as interest rates and currency markets shift, with mark-to-market gains or losses appearing in quarterly profit-and-loss statements unless companies qualify for hedge accounting. A senior foreign banker noted that for large listed companies, this volatility could lead to significant quarterly P&L fluctuations, making the strategy more complex than traditional funding approaches.
