The softening of the Indian rupee-US dollar forward rate on the back of the forex swap, if sustained in future might provide a fillip to Indian borrowers that plan to raise foreign currency-denominated capital.
The latest foreign exchange swap window opened by the RBI can reduce the cost of borrowing for the top 500 corporate borrowers of foreign funds in India with a cumulative reduction upto Rs 7,000 crore, according to a report.
“The interest outgo of the top 500 debt-heavy corporate borrowers could cumulatively reduce by Rs 4000 crore-7000 crore, assuming a 0.50%-0.75% reduction in the cost of forex borrowings and a 50bp-200bp rise in the share of forex borrowings in the outstanding debt of these corporates,” said India Ratings and Research in a report.
The $5 billion reserve swap auction by the RBI was taken in a bid to improve the pace of monetary transmission and improve the liquidity in the economy. Under it, the central bank bought $5 billion from the market through auction for three years on March 2019 and will sell the same amount back to the respective counterparties in March 2022. It is said to take another swap in on April-23.
The swap auctions in March 2019 and April 2019 provide institutional investors an opportunity to benefit from the relatively high domestic real interest rates in India while hedging their forex risk at attractive rates. The report noted an increase in US dollar liquidity conditions in the domestic market following the move. The total settlement volume, as a percentage of forex reserves, increased to 3.28 per cent during March 2019.
The softening of the Indian rupee-US dollar forward rate on the back of the forex swap, if sustained in future might provide a fillip to Indian borrowers that plan to raise foreign currency-denominated capital, said the report. Moreover, if the inflow of foreign funds continue and the hedging cost remains low, foreign currency borrowing could pick up significantly during the fiscal year 2019-20, lowering the demand supply gap in the domestic credit markets, the report added.
Though the move will make available additional deposits of about Rs 69,000 crore to the banking sector, it will not be able to significantly reduce the aggregate banking system liquidity shortfall, the report noted. For a meaningful traction in deposit growth, both endogenous and exogenous factors should continue to contribute in a sustainable manner over the near to medium term, the report added.
The report pegs non-food credit growth will reach Rs 11.68 lakh crore in FY20 and the deposit shortfall will be Rs 2.79 lakh crore even after the proceeds from the swap window and an increase in credit-deposit ratio.