Industry Odisha Bureau, Oct 01: Lenders are pitching large corporates a two-step route to dollar funding. Firms would issue domestic bonds, then use swaps to create synthetic dollar liabilities. The potential savings come with accounting risks.
For some of India’s large corporates, cheaper dollars may now come from home. Some Indian banks are pitching a funding route that starts in domestic bonds. Talks are under way with several companies for three-to-five-year borrowings. However, no deal has been executed yet, bankers said.
How the Route Works
First, a company raises rupee debt in the domestic bond market. It then signs a separate currency swap with a bank. The swap exchanges its rupee cash flows for dollar cash flows. The bond itself remains a rupee instrument. Yet the company’s effective exposure resembles a dollar liability. It gains dollar funding without borrowing from an overseas lender.
Bankers are targeting firms with dollar revenue or offshore operations. Such companies are better placed to absorb the currency exposure created.
The Numbers Behind the Pitch
Bankers offered an example using a AAA-rated corporate borrower. It could raise five-year funding in the US at around 6–6.20%. At home, the same borrower might pay 8–8.25%. On paper, rupee debt looks costlier.
Through the swap, the company receives about 8% from the bank. That payment can service its domestic bondholders. In return, it pays 8% minus the forward premium. With the premium near 3–3.50%, the effective cost drops to roughly 4.75–5%. That remains below offshore rates.
Where MIFOR and SOFR Fit
The swaps are priced off MIFOR, the Mumbai Interbank Forward Outright Rate. India uses it for interest-rate swaps, forward-rate agreements and cross-currency derivatives. SOFR, the Secured Overnight Financing Rate, benchmarks dollar-denominated derivatives and loans.
A senior foreign banker said the MIFOR-SOFR gap, the forward premium, has widened. That gap earlier stood at around 2.50–2.75%. The banker said this widening is why the transaction works.
Why the Window Has Opened
Bankers say the US Federal Reserve’s rate hike lifted dollar borrowing costs. Indian rates have risen too, though India’s hiking cycle has not begun.
The 10-year US Treasury yields 5.23%, a multi-year high. India’s equivalent yields 7.16%, a gap of 193 basis points. Factoring in hedging costs near 3.5%, direct offshore dollars work out costlier.
Axis Bank’s Tanay Dalal said a fully hedged 7.16% yield equals about 4.21% in dollars. Against the 5.23% Treasury, that saves about 100 basis points.
Deposits Help Pricing
Foreign-currency deposits are also supporting pricing. Strong inflows into Foreign Currency Non-Resident (Bank), or FCNR(B), accounts have helped. Banks now hold ample liquidity to deploy through such structures.
Another foreign banker said an 8.2% fixed rupee rate could become 7.50–7.60% post-swap. That implies a gain of 50–70 basis points.
The Accounting Catch
The trade is not without risk. Swap values can swing sharply, creating mark-to-market gains or losses. Without hedge accounting, these land in quarterly profit-and-loss statements. The first foreign banker said the economics may work but are not straightforward. For large listed firms, the banker warned, quarterly earnings could become volatile.
A Window, Not Free Money
The pitch rests on unusual pricing across rupee and dollar markets. Its appeal depends on rate gaps, forward premiums and hedging costs. For now, the route remains a proposal, with no deal executed.
