State-run banks are entering into reciprocal deposit agreements with their foreign counterparts to borrow dollars via cross-currency swaps to meet their dollar requirements, two people with direct knowledge of the development said.
As a part of this reciprocal agreement, public-sector banks such as UCO Bank, Allahabad Bank, Punjab National Bank, Union Bank and others are offering the local currency to foreign banks in exchange for the greenback.
This has helped the lenders to meet their dollar requirement without actually having to buy dollars in the foreign exchange market, or having to depend solely on their foreign currency deposits. It has also enabled them to borrow dollars at a lower cost.
“If I need $200 million for 5 years for a certain customer, I can easily get it through this route. I would not buy the dollars because then I would have an open position, and I can’t keep a position open for such a long period of time,” the head of treasury operations at a Mumbai-based public-sector lender said.
Through this route, banks have been able to garner dollars at a borrowing cost that is only about 5-10 basis points higher than the LIBOR (1.7%). The London Interbank Offered Rate, or LIBOR, is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. In comparison, state-run lenders are paying a coupon of 3.25% to as high as 5.20% on bonds that they have raised in the overseas market, according to Bloomberg data.
On the other hand, foreign banks have been able to get rupee liquidity at MIBOR.
You might also want to see this:
MIBOR, or the Mumbai Interbank Offered Rate, is about 6.25%, which is lower than the one-year certificate of deposit (CD) rate of about 6.83%. The demand for the rupee has been strong with foreign portfolio investors (FPIs) investing heavily in Indian equity and debt. They have invested more than $17 billion so far this year in Indian assets.
PSBs have been raising dollars in tranches of $100 to $200 million through currency swap agreements, a senior official at a large foreign bank said. The funds raised through this route is generally being used by lenders to meet their overseas fund requirement, or to lend of customers who need dollar liquidity.