RBI’s Forex Swap Facility To Lower Funding Costs, Boost Overseas Borrowing: S&P Global

New Delhi, Jul 2 (KNN) The Reserve Bank of India's (RBI) concessional forex swap facility will reduce funding costs for government-owned financial institutions and is likely to prompt an increase in their external borrowings, S&P Global Ratings said in a report on Thursday.

The RBI announced the facility last month to encourage public sector undertakings to raise external commercial borrowings until 30 September. Under the scheme, the RBI will offer a concessional premium of 1.5 per cent per annum on fixed US dollar-Indian rupee swaps for three to five years on ECBs raised by public sector companies.

In its report titled ‘Indian Government-owned Financial Institutions: The RBI Swap Effect will Increase Offshore Activity’, S&P said the swap agreement eliminates currency risk at a significantly lower cost than the market, making overseas borrowing more attractive for government-related entities, PTI reported.

S&P analyst Geeta Chugh noted that incentivising overseas borrowings by government-owned financial institutions serves a dual purpose — drawing in foreign exchange to bolster reserves and support the rupee, while channelling international capital through institutional lenders to create a credit multiplier effect across the Indian economy.

GREs Set to Benefit

Government-related entities in India's financial sector — which S&P identifies as one of four strategic sectors — are particularly well-placed to benefit, especially those with explicit policy mandates. The entities covered include PFC, REC, IRFC, NABARD, NHB, Exim Bank, HUDCO, SIDBI, IREDA, and NaBFID.

S&P highlighted that government linkages provide these institutions with financial flexibility, access to cheaper funding, and a mechanism for asset quality support. Many non-bank GREs operate in segments of national interest. 

S&P credit analyst Deepali Seth-Chhabria said loan growth for financial GREs was expected to hold at around 15 per cent per year over the next two years, supported by mandates to drive development in strategic sectors.

(KNN Bureau)